Economics: Principles & Policy
14th Edition
ISBN: 9781337696326
Author: William J. Baumol; Alan S. Blinder; John L. Solow
Publisher: Cengage Learning
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Chapter 26, Problem 5DQ
To determine
Why the rising prices reduces the multiplier effect on an autonomous increase in AD.
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Using a diagram, show and explain why rising prices reduce the multiplier effect of an increase in aggregate demand.
Explain how an upsloping aggregate supply curve weakens the realized multiplier effect.
Explain how an upsloping aggregate supply curve weakens the realized multiplier effect from an initial change in investment spending.
Chapter 26 Solutions
Economics: Principles & Policy
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- The determinants of aggregate demand explain shifts in the aggregate demand curve. How does a change in investment spending affect aggregate demand? Asaparrow_forwardWhy does the economy's aggregate demand curve have a negative slope?arrow_forwardExamine the following policies and determine which would decrease the level of aggregate demand. Decreasing in government spending and decreasing taxes Increasing investment and increasing government spending Increasing consumption and decreasing taxes Decreasing in government spending and increasing in taxesarrow_forward
- Explain with example how a reduction in taxes without a reduction in government spending may have no impact on aggregate demand.arrow_forwardIf there is an increase in government expenditures and an increase in taxes by an equal amount by how much will the aggregate demand increase?arrow_forwardComplete the table by indicating the change in each determinant necessary to decrease aggregate demand. Change Needed to Decrease AD Wealth Taxes Expected rate of return on investment Incomes in other countriesarrow_forward
- Give three reasons why the aggregate demand curve slopes downward.arrow_forwardOn the following graph, show the effect of the change in investment demand on the AD curve once the multiplier process has run its course. Use the green curve (triangle symbol) to plot the new AD curve at price levels of 40 and 140. Hint: Use the new quantity of investment demanded you found in the Market for Investment and the multiplier to determine the exact change in aggregate demand at both price levels. Assume that this effect is independent of the price level, that is, the AD curve has a parallel shift. An expansionary monetary policy causes the quantity of bank reserves in the economy to ________(INCREASE/DECREASE) , which drives interest rates _______ (UP / DOWN) . As a result, businesses invest______(MORE/LESS) in capital improvements such as new factories and equipment. This leads to ________(AN INCREASE. A DECERASE) in aggregate demand, the extent of which is determined by the simple spending multiplier.arrow_forwardThe federal government buys $20 million worth of computers from Dell. If the MPC is 0.60, what will be the impact on aggregate demand, other things being equal?arrow_forward
- Suppose that the price level is constant and that investment decreases sharply. How would you show this decrease in the aggregate expenditures model? What would be the outcome for real GDP? How would you show this fall in investment in the aggregate demand–aggregate supply model, assuming the economy is operating in what, in effect, is a horizontal section of the aggregate supply curve?arrow_forwardare my answers correct?arrow_forwardх, х* A v P v Av Normal No Spacing Heading 1 Heading 2 Styles Pane U v ab Dicta Reading the following paragraph has a multiplier occurred and how is this shown on the aggregate demand model or IS curve model? New Delhi has also devised a complex scheme to permit central government employees, public sector bank staff, and staff of state-owned enterprises to use money allocated for home leave and other holiday travel to instead purchase consumer goods. Aggregate demand model for India's economy IS curve model for India Y = AD Interest rate Aggregate demand (AD) $billions AD = C + I + G + ( X -M) Where C=a +b (1-t)Y R IS 45° Y1 Output(Y) $Billions Output (Y) $billions O Focus 目 English (United Kingdom)arrow_forward
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