The Aggregate Supply / Aggregate Demand Model: Conceptual Questions and Solutions

Intermediate Macroeconomics Problems and Solutions - Section 7

See Mr. Stolyarov's complete index of Intermediate Macroeconomics Problems and Solutions here.

Problem 31. Which of these explain the downward slope of the Aggregate Demand (AD) curve? More than one answer is possible.

(a) International Forces: Domestic goods become relatively cheaper with respect to foreign goods when domestic prices decline.
(b) Debtors become richer than they were expecting to as a result of the drop in prices.
(c) As prices increase, creditors become richer.
(d) The Multiplier Effect: Government spending increases total output in the economy by more than the amount of the spending.
(e) The Wealth Effect: Consumers' purchasing power increases as prices decline.
(f) The Inflation Tax: As prices increase, the cost of holding onto cash increases.
(g) There is a negative relationship between prices and output. As prices decline, output increases.

Solution 31. The three factors which explain the downward slope of the Aggregate Demand (AD) curve are
(a): International Forces: Domestic goods become relatively cheaper with respect to foreign goods when domestic prices decline.
(e): The Wealth Effect: Consumers' purchasing power increases as prices decline.
(g): There is a negative relationship between prices and output. As prices decline, output increases.

Problem 32. Which of these macroeconomic models allows one to conclude that expansionary monetary policy can be inflationary?

(a) The Random Walk model
(b) The Simple Keynesian model
(c) The IS-LM model
(d) The Aggregate Supply-Aggregate Demand (AS-AD) model
(e) The Theory of Just Price
(f) The Black-Scholes model