c
 is the aggregate demand curve down sloping?


 this different from the down

sloping demand curve for a product? 

 the multiplier effect the shifting of the aggregate
demand curve?

The multiplier effect magnifies small changes in spending into larger changes in output and
income. Any increase in spending will increase output through the multiplier effect. This increase will
occur regardless of the inflation rate in the economy; therefore it will cause the Aggregate Demand
curve to shift out.

×
 is the long-run aggregate supply curve vertical? 
 the shape of the short-run
aggregate supply curve? 
 the short-run curve relatively flat to the left of the full
employment output and relatively steep to the right?


 does a reduction in aggregate demand reduce real output, rather than the price level?

 a full-strength multiplier apply to a decrease in aggregate supply but not to the
increase?

A reduction in aggregate demand will reduce both real output and price. It will cause the
IS and LM curve to shift to the left. At the new equilibrium, real output and price will decline.
Interest rate will increase.
A reduction in government purchase, for example, will reduce income and real output=
multiplier x government purchase.


 effects would each of the following have on aggregate demand or aggregate supply? 


, state the expected effects on the equilibrium price level and level of real output.
Assume that all other things remain constant. Place your answer after each statement.
a. A widespread fear of depression on the part of consumers.
b. A $2 increase in the excise tax on a pack of cigarettes.
c. A reduction in interest rates at each price level.
d. A major increase in Federal spending for health care.
e. Depreciation in the international value of the dollar.

What effects would each of the following have on aggregate demand or aggregate supply? In each case
use a diagram to show the expected effects on the equilibrium price level and level of real output.
Assume that all other things remain constant.

a. A widespread fear of depression on the part of consumers.

b. A $2 increase in the excise tax on a pack of cigarettes.

c. A reduction in interest rates at each price level.

d. A major increase in Federal spending for health care.

e. The expectation of rapid inflation.

f. The complete disintegration of OPEC, causing oil prices to fall by one-half.

g. A 10 percent reduction in personal income tax rates.

h. A sizable increase in labor productivity (with no change in nominal wages).

i. A 12 percent increase in nominal wages (with no change in productivity).

j. Depreciation in the international value of the dollar.

’

(a) AD curve left, output down, and price level down (assuming no ratchet effect).

(b) AS curve left, output down, and price level up.

(c) AD curve right, output and price level up.

(d) AD curve right, output and price level up (any real improvements in health care resulting from the
spending would eventually increase productivity and shift AS right).

(e) AD curve right, output and price level up.

(f) AS curve right, output up and price level down.

(g) AD curve right, output and price level up.

(h) AS curve right, output up and price level down.

(i) AS curve left, output down and price level up.

(j) AD curve right (increased net exports); AS curve left (higher input prices)