Question

MACROECONOMICS - Aggregate demand curve--- MULTIPLE CHOICe -- PLEASE EXPLAIN YOUR ANSWER/explain your choice

SECTION 1: Graphically, what would cause the aggregate demand curve to shift to the right?

A) an increase in taxes

B)   decrease in government spending on goods and services

C) an increase in net tax revenues

D) Counter-cyclical fiscal policy and a recessionary gap

E) Counter-cyclical fiscal policy and an inflationary gap.

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SECTION 2:

Which of the following is true regarding the aggregate demand curve?

A) it is upward-sloping because the production costs rise as real output increases.
B) it is downward-sloping because production costs decline as real output increases

C) It is upward sloping because at higher output levels total spending is higher.

D) it is downward- sloping because a lower price means higher real wealth and therefore people will purchase more.

E) It is downward-sloping because at lower prices total incomes are higher

Answer 1

Answer 1.D) Counter-cyclical fiscal policy and a recessionary gap

REASON-

Counter-cyclical fiscal policy measures in a recessionary gap increase spending and cut taxes. This leads to a rightward shift of the AD curve.

Answer 2. D) it is downward- sloping because a lower price means higher real wealth and therefore people will purchase more.

REASON-

Lower price level raises the money supply (M/P) that is the wealth of the economy rises. When purchasing power rises, buyers are wealthier and are able to buy more goods and services. So, output rises when the price falls. Hence, the negative slope of the AD curve.