Worksheet 17.1: Intro to AD

Transcription

1 Worksheet 17.1: Intro to After watching Jason Welker s An Introduction to Aggregate Demand video found at answer the following questions. 1. What factors cause a change in? 2. What does household wealth refer to? 3. What determines the level of government spending? 4. How do exchange rates impact?

2 Copyrighted Material - Do Not Post Answers Online Worksheet 17.1: Intro to Answer Key After watching Jason Welker s An Introduction to Aggregate Demand video found at answer the following questions. 1) What factors cause a change in? Changes in consumer spending, investment spending, government spending and net exports will change. 2) What does household wealth refer to? Household wealth is the value a household s assets minus its liabilities. 3) What determines the level of government spending? Fiscal policy of the Congress to enact spending and change tax rates determines the level of government spending. State and local governments policies may affect the level of government spending. 4) How do exchange rates impact? Exchange rate appreciation: Domestic goods are becoming more expensive for foreigners to buy, therefore exports fall and shifts left. Exchange rate depreciation: Domestic goods are becoming cheaper for foreigners to buy, therefore exports rise and shifts right.

3 Worksheet 17.2: Aggregate Demand Determine the effect on aggregate demand of each of the following events. Explain whether it represents a change in quantity demanded represented by a movement along the curve (up or down) or a change in demand represented by a shift of the curve (left or right). (Remember, explain means how and why.) Then, in a correctly labeled graph, show how each of the following will affect the curve. 1. Business owners are less optimistic about the health of the economy. 2. The government decreases welfare and veteran s benefits. 3. The Federal Reserve increases interest rates. 4. A rising price level decreases the value of money held for purchases. 5. The government lowers personal income taxes. 6. Consumers expect the job market to be much stronger in the next few months. 7. The stock market has reached new records high levels of value. 8. The stock of physical capital has been falling for nearly a year.

4 Copyrighted Material - Do Not Post Answers Online Worksheet 17.2: Aggregate Demand Answer Key Determine the effect on aggregate demand of each of the following events. Explain whether it represents a change in quantity demanded represented by a movement along the curve (up or down) or a change in demand represented by a shift of the curve (left or right). (Remember, explain means how and why.) Then, in a correctly labeled graph, show how each of the following will affect the curve. 1. Business owners are less optimistic about the health of the economy. shifts left; investment spending decreases 2 2. The government decreases welfare and veteran s benefits. shifts left; decrease in disposable income and therefore consumer spending 2 3. The Federal Reserve increases interest rates. shifts left; decrease in investment and interest sensitive consumer spending 2 4. A rising price level decreases the value of money held for purchases. There is a movement down the curve as consumer purchasing power erodes

5 Copyrighted Material - Do Not Post Answers Online 5. The government lowers personal income taxes. shifts right. Lower taxes implies higher disposable income so consumer spending rises and shifts right 2 6. Consumers expect the job market to be much stronger in the next few months. shifts right; expectations about future employment increase investment and consumer spending 2 7. The stock market has reached new records high levels of value. shifts right; consumer wealth increases causing more consumer spending 2 8. The stock of physical capital has been falling for nearly a year. shifts right; investment will increase to replace the failing stock of capital. 2

6 Exit Slip: Module The interest rate effect is the tendency for changes in the price level to affect A. the quantity of investment demanded and thus affect interest rates. B. export demand and thus affect aggregate demand. C. interest rates and thus affect the quantity of investment and consumption demanded. D. real incomes and lead to shifts in potential output. E. interest rates and thus affect the productivity of existing capital equipment. 2. Draw a correctly labeled graph to show the impact of an increase in taxes on aggregate demand. 3. When the aggregate price level rises, this will, other things equal, A. lead to a rightward shift in the curve. B. lead to a leftward shift in the curve. C. result in a decrease in the quantity of aggregate output demanded. D. result in an increase in the quantity of aggregate output demanded. E. result in a decrease in the quantity of aggregate output supplied.

7 Copyrighted Material - Do Not Post Answers Online Exit Slip: Module 17 Answer Key 1. The interest rate effect is the tendency for changes in the price level to affect A. the quantity of investment demanded and thus affect interest rates. B. export demand and thus affect aggregate demand. C. interest rates and thus affect the quantity of investment and consumption demanded. D. real incomes and lead to shifts in potential output. E. interest rates and thus affect the productivity of existing capital equipment. (C) 2. Draw a correctly labeled graph to show the impact of an increase in taxes on aggregate demand. 3. When the aggregate price level rises, this will, other things equal, A. lead to a rightward shift in the curve. B. lead to a leftward shift in the curve. C. result in a decrease in the quantity of aggregate output demanded. D. result in an increase in the quantity of aggregate output demanded. E. result in a decrease in the quantity of aggregate output supplied. (C)

8 MODULE 17: AGGREGATE DEMAND: INTRODUCTION AND DETERMINANTS In-Class Presentation of Module and Sample Lecture Suggested time: This module can be covered in one hour-long class period. I. Aggregate Demand A. Why Is the Aggregate Demand Curve Downward Sloping? 1. Wealth Effect 2. Interest Rate Effect B. Shifts of the Aggregate Demand Curve 1. Changes in Expectations 2. Changes in Wealth 3. Size of the Existing Stock of Physical Capital C. Government Policies and Aggregate Demand 1. Fiscal Policy 2. Monetary Policy I. Aggregate Demand is a curve that shows the relationship between the aggregate price level and the quantity of aggregate output demanded by households, firms, the government, and the rest of the world. A. Why is the curve downward sloping? Students think that the downward slope of the aggregate demand curve is a natural consequence of the law of demand. Since the demand curve for any one good is downward sloping, isn t it natural that the demand curve for aggregate output is also downward sloping? This is a misleading parallel. The demand curve for any individual good shows how the quantity demanded depends on the price of that good, holding the prices of other goods and services constant. Example: The demand curve for apples is downward sloping because all else equal, if the price of apples goes up, consumers will switch to a substitute fruit like bananas. With, we are talking about the aggregate price level rising for all goods and services in the economy. 1. Wealth or real balances effect When price level falls, purchasing power of existing financial assets (like money in your savings account) rises, this can increase consumer spending and there is a downward movement along the fixed curve. 2. Interest-rate effect A decline in price level means lower interest rates which can increase levels of certain types of spending. How does this work? 2015, BFW/Worth Publishers Section 4, Module 17 Page 1

9 A lower price level increases the purchasing power of money in your pocket so you need to hold less money to buy your goods and services. This decrease in the demand for money holdings puts downward pressure on interest rates. Remind students that we learned that nominal interest rate = real interest rate + expected inflation. If inflation expectations gradually fall, nominal interest rates should also gradually fall. Lower interest rates will increase investment spending, thus increasing real GDP along the curve. B. Shifts of the Aggregate Demand Curve There are shifts of the aggregate demand curve, changes in the quantity of goods and services demanded at any given price level. An increase in aggregate demand means a shift of the aggregate demand curve to the right, as shown in the figure below. A rightward shift occurs when the quantity of aggregate output demanded increases at any given aggregate price level. A decrease in aggregate demand means that the curve shifts to the left. A leftward shift implies that the quantity of aggregate output demanded falls at any given aggregate price level. Whether shifts to the right or left, that is spending is increasing or decreasing, the multiplier effect is always at work. 1. Changes in Expectations When consumers and firms are more optimistic about their future economic prospects, they will increase consumption and investment spending. This shifts to the right. 2. Changes in Wealth We discussed in the last module that the consumption function shifts up (or consumption spending increases) if consumer wealth increases. When the value of accumulated household assets goes up, consumers respond by increasing current consumption. This shifts to the right. This is one reason why a weak stock market or real estate market has a negative ripple effect in the economy by shifting to the left. 2015, BFW/Worth Publishers Section 4, Module 17 Page 2

10 3. Size of the Existing Stock of Physical Capital Firms plan to invest in physical capital when the stock is being depleted or is insufficient to meet demand for their products. Therefore, if physical capital stock is being depleted, investment spending will pick up causing to shift to the right. Alternatively, if firms have plenty of physical capital already, investment spending will slow down. This will shift to the left. C. Government Policies and Aggregate Demand Note: prepare the students for future chapters on fiscal and monetary policy by getting them to think about how the government can affect. Government can have a powerful influence on aggregate demand and that, in some circumstances, this influence can be used to improve economic performance. The two main ways the government can influence the aggregate demand curve are through fiscal policy and monetary policy. 1. Fiscal Policy Congress and the President control fiscal policy. Fiscal policy is the use of either government spending government purchases of final goods and services and government transfers or tax policy to stabilize the economy. Suppose the economy was in a recession. The government can intervene directly or indirectly. If the government increases spending (G), it will have a direct impact on. This is because the overall demand for goods and services is rising, shifting to the right. If the government decreased taxes, this would increase disposable income, and this would increase consumption spending. The increase in C raises demand and would shift the curve to the right, helping to indirectly reverse the recession. 2. Monetary Policy The Federal Reserve controls monetary policy the use of changes in the quantity of money or the interest rate to stabilize the economy. When the Fed increases the quantity of money in circulation, households and firms have more money, which they are willing to lend out.* This drives the interest rate down at any given aggregate price level, leading to higher investment spending and higher consumer spending. Thus, increasing the quantity of money shifts the aggregate demand curve to the right. *Note: It may useful to explain to students the difference between money and income. That is why people won t buy more goods with money and choose to lend because their Consumption spending is related to income and not money holding. Students will be exposed in great detail to monetary policy in upcoming chapters of the text. 2015, BFW/Worth Publishers Section 4, Module 17 Page 3