AP_Krugman_Textbook

178 section 4 National Income and Price Determination

Tackle the Test: Multiple-Choice Questions

1. Which of the following explains the slope of the aggregate
   demand curve?
   I. the wealth effect of a change in the aggregate price level
   II. the interest rate effect of a change in the aggregate price
   level
   III. the product-substitution effect of a change in the
   aggregate price level
   a. I only
   b. II only
   c. III only
   d. I and II only
   e. I, II, and III


2. Which of the following will shift the aggregate demand curve to
   the right?
   a. a decrease in wealth
   b. pessimistic consumer expectations
   c. a decrease in the existing stock of capital
   d. contractionary fiscal policy
   e. a decrease in the quantity of money
   3. The Consumer Confidence Index is used to measure which of
   the following?
   a. the level of consumer spending
   b. the rate of return on investments
   c. consumer expectations
   d. planned investment spending
   e. the level of current disposable income
   4. Decreases in the stock market decrease aggregate demand by
   decreasing which of the following?
   a. consumer wealth
   b. the price level
   c. the stock of existing physical capital
   d. interest rates
   e. tax revenues
   5. Which of the following government policies will shift the
   aggregate demand curve to the left?
   a. a decrease in the quantity of money
   b. an increase in government purchases of goods and services
   c. a decrease in taxes
   d. a decrease in interest rates
   e. an increase in government transfers

Tackle the Test: Free-Response Questions

1. a. Draw a correctly labeled graph showing aggregate demand.
   b. On your graph from part a, illustrate an increase in
   aggregate demand.
   c. List the four factors that shift aggregate demand.
   d. Describe a change in each determinant of aggregate
   demand that would lead to the shift you illustrated in
   part b.

Answer (12 points)

1 point:Vertical axis labeled “Aggregate price level” (or “Price level”)

1 point:Horizontal axis labeled “Real GDP”

Real GDP

Aggregate
price
level

AD 1 AD 2

Increase in

Aggregate

Demand

1 point:Downward sloping curve labeled “AD” (or “AD 1 ”)

1 point:AD curve shifted to the right

1 point:Expectations

1 point:Wealth

1 point:Size of existing stock of physical capital

1 point:Government policies

1 point:Consumers/Producers more confident

1 point:Increase in wealth

1 point:Lower existing stock of physical capital

1 point:An increase in government spending or in the money supply

2. Identify the two effects that cause the aggregate demand curve
   to have a downward slope. Explain each.