Question 1

If the price level rises, the purchasing power of real wealth

Accepted Answer

When the price level rises, the value of money decreases. As a result, less can be purchased with the same amount of money, which means the purchasing power of real wealth decreases.

Question 2

The international substitution effect of a change in the price level results from a

Accepted Answer

The international substitution effect refers to the tendency of consumers to substitute foreign goods for domestic goods (or vice versa) when the relative prices of those goods change. Therefore, a change in the price of foreign goods relative to domestic goods is the key factor behind the international substitution effect. Answer B refers to the intertemporal substitution effect, which is the tendency of consumers to shift their consumption between current and future periods in response to changes in relative prices. Answer C refers to the wealth effect, which is the tendency of changes in the price level to alter the purchasing power of consumers' wealth. While these effects may also influence consumers' decisions, they do not directly relate to the international substitution effect.

Question 3

A shift in the aggregate expenditure curve as a result of an increase in the price level results in a

Accepted Answer

An increase in the price level leads to a movement up along the aggregate demand curve, as higher prices reduce the quantity of goods and services demanded.

Question 4

The larger the multiplier, the the AE curve and the the AD curve from an increase in investment.

Accepted Answer

A larger multiplier indicates that an initial change in investment will generate a larger change in aggregate demand (AD). As a result, the AE curve will be steeper (since it reflects the relationship between planned expenditure and output) and the shift in the AD curve will be larger (since it reflects the relationship between the overall level of expenditure and output).

Question 5

Any change in the price level will result in a

Accepted Answer

Any change in the price level, such as an increase in inflation, will result in a movement along the AD (Aggregate Demand) curve because it affects the quantity of real GDP (Y) demanded. The AE (Aggregate Expenditure) curve will shift if there is a change in any of the components of AE (C + I + G + NX), such as a change in consumer confidence, government spending, or exports. However, a change in the price level would not directly cause a shift in the AE curve, only a movement along it.

Question 6

If the price level increases, the AE curve shifts

Accepted Answer

When the price level increases, the aggregate expenditure (AE) curve shifts downward, and we move along the aggregate demand (AD) curve, reflecting a decrease in real GDP demanded at higher price levels.

Question 7

An increase in investment spending results in a the aggregate expenditure curve and
The aggregate demand curve.

Accepted Answer

An increase in investment spending represents an increase in one of the components of aggregate expenditure (i.e. C + I + G + NX). This leads to a shift in the aggregate expenditure curve, as the new level of investment spending affects the overall level of spending in the economy. Additionally, since aggregate demand (AD) is the total spending in the economy at a given price level, an increase in investment spending will also result in a shift in the AD curve. This is because AD is the sum of consumption, investment, government spending, and net exports, so an increase in investment spending will increase the overall level of AD at each price level.

Question 8

The multiplier measures the

Accepted Answer

The multiplier effect refers to the horizontal shift in the aggregate demand curve resulting from an increase in autonomous spending, as it amplifies the initial change in spending through the economy.

Question 9

If investment increases by $150 and, in response, equilibrium expenditure rises by $600,

Accepted Answer

The multiplier is calculated as the change in equilibrium expenditure divided by the initial change in investment. In this case, the multiplier is 4.0 ($600/$150), which means that a change in investment of $1 will lead to a change in equilibrium expenditure of $4.0.

Question 10

Which of the following shifts the aggregate demand curve rightward?

Accepted Answer

An increase in government expenditures will increase aggregate demand by increasing spending in the economy. This will shift the aggregate demand curve rightward. A decrease in investment, as in choice C, would shift the aggregate demand curve leftward. Choice A is incorrect because an increase in the price level would shift the aggregate demand curve leftward, while choice B is incorrect because an increase in income tax rates would also shift the aggregate demand curve leftward.

Question 11

An increase in shifts the AE curve and an increase in shifts the aggregate demand curve .

Accepted Answer

An increase in the price level would shift the AE curve downward because higher prices reduce consumer purchasing power and therefore reduce overall spending. An increase in autonomous expenditure (such as government spending or investment) would shift the aggregate demand curve rightward because it would increase overall spending in the economy.

Question 12

The aggregate demand curve slopes downward because of

Accepted Answer

The wealth effect of a decrease in price level increases real wealth, leading to an increase in consumption expenditure as well as aggregate demand. The substitution effect of a decrease in price level makes foreign goods more expensive and domestic goods relatively cheaper, causing an increase in net exports, which also increases aggregate demand. Both effects lead to a downward slope of the aggregate demand curve. The multiplier, MPC, import, or taxation effects relate to specific mechanisms that affect the magnitude or shape of the aggregate demand curve but not its slope.

Question 13

Intertemporal substitution means changes in purchases

Accepted Answer

Intertemporal substitution refers to changes in purchases over time, as individuals may choose to delay or advance consumption depending on their preferences and expectations about future prices or income. The other options (B, C, D) do not represent the concept of intertemporal substitution.

Question 14

The intertemporal substitution effect of a change in the price level results from a

Accepted Answer

The answer of The intertemporal substitution effect of a change...

Question 15

Because the short- run aggregate expenditure model assumes that the price level is , its predicted effect of changes in autonomous expenditure on equilibrium output is than the prediction of the AD/SAS model.

Accepted Answer

The short-run aggregate expenditure model assumes that the price level is fixed, which means that changes in autonomous expenditure have a greater effect on equilibrium output compared to the AD/SAS model, where prices can adjust.

Question 16

A fall in the price level

Accepted Answer

A fall in the price level increases the quantity of real GDP demanded, shifting the aggregate expenditure curve upward, as consumers and businesses are likely to spend more due to lower prices.

Question 17

If investment decreases, the AE curve shifts

Accepted Answer

Investment is a component of aggregate expenditure (AE), so if it decreases, AE decreases. This causes a downward shift in the AE curve. The decrease in AE results in less demand for goods and services, causing the aggregate demand (AD) curve to shift leftward.

Question 18

The wealth effect of an increase in the price level results from a

Accepted Answer

The wealth effect of an increase in the price level results from a change in the purchasing power of wealth. As prices increase, the purchasing power of wealth decreases, causing individuals to feel less wealthy and reducing consumption. Choices A and B are not correct as they do not relate to the wealth effect.

Question 19

Which of the following shifts the aggregate expenditure curve AND shifts the aggregate demand cu
I. a decrease in investment
II. a change in the price level
III. an increase in exports

Accepted Answer

A decrease in investment and an increase in exports both directly affect aggregate expenditure and aggregate demand, shifting both curves. A change in the price level does not shift these curves; it causes movement along them.

Question 20

An increase in the price level results in a

Accepted Answer

An increase in the price level causes the AE curve to shift downward because higher prices reduce consumption and investment. Meanwhile, it results in a movement up along the AD curve as the quantity of goods and services demanded decreases at higher price levels.

Quiz 11: Expenditure Multipliers: They Keynesian Model