Question

1. The aggregate demand curve shows the:

A. Inverse relationship between the price level and the quantity of real GDP purchased

B. Direct relationship between the price level and the quantity of real GDP produced

C. Inverse relationship between interest rates and the quantity of real GDP produced

D. Direct relationship between real-balances and the quantity of real GDP purchased

2. The following factors explain the inverse relationship between the price level and the total demand for output, except:

A. A substitution effect

B. A real-balances effect

C. An interest-rate effect

D. A foreign-purchases effect

3. When the price level decreases:

A. The demand for money falls and the interest rate falls

B. Holders of financial assets with fixed money values decrease their spending

C. Holders of financial assets with fixed money values have less purchasing power

D. There is a decrease in consumer spending that is sensitive to changes in interest rates

4. The foreign purchases effect on aggregate demand suggests that a:

A. Fall in our domestic price level will increase our imports and reduce our exports, thereby reducing the net exports component of aggregate demand

B. Fall in our domestic price level will decrease our imports and increase our exports, thereby reducing the net exports component of aggregate demand

C. Rise in our domestic price level will increase our imports and reduce our exports, thereby reducing the net exports component of aggregate demand

D. Rise in our domestic price level will decrease our imports and increase our exports, thereby reducing the net exports component of aggregate demand

Answer 1

1. A. Inverse relationship between the price level and the quantity of real GDP purchased
(AD shows the inverse relationship between P and Y.)

2. A. A substitution effect
(Other three factors explain the inverse relationship.)

3. A. The demand for money falls and the interest rate falls
(Demand for money falls with decrease in price level and thus interest rate falls.)

4. C. Rise in our domestic price level will increase our imports and reduce our exports, thereby reducing the net exports component of aggregate demand
(As price rise, imports increase and exports decrease which decrease net exports.)