Economics Micro & Macro (CliffsAP)

Figure 4-9

Review of Key Points

■ Aggregate demand is the quantity of all goods and services in an economy that consumers are willing to purchase

at various price levels.

■ The aggregate demand curve is sloped because of the real-balance, interest-rate, and the foreign-purchases effect.

Any change in these determinants will shift aggregate demand.

■ Consumption increases as incomes increase. The propensity to consume is the likelihood that one will purchase

more. The percentage of additional disposable income that will be used for consumption is called the marginal

propensity to consume. Whatever income is not used for consumption is then used for savings (the marginal

propensity to save).

■ A firms’ investment is dependent on interest rates, availability, and future profitability.

■ Changes in imports and exports depend on relative prices of goods in the foreign sector.

■ The aggregate supply curve is positively sloped. It describes the quantity of all goods in the economy that suppli-

ers are willing to sell at each price level.

Chapter Review Questions

1. Which one of the following is an example of “investment” as used by an economist?
   A. A schoolteacher purchases 10,000 shares of stock in an automobile company.
   B. Newlyweds purchase a previously owned home.
   C. One large automobile firm purchases another large automobile firm.
   D. A firm purchases $10,000 worth of government securities.
   E. An apparel company purchases 15 new sewing machines.


2. Which one of the following will cause the aggregate demand curve to shift to the right?
   A. Expectations of surpluses of goods in the future
   B. An increase in income taxes
   C. An increase in government spending
   D. An increase in foreign income
   E. Unemployment

Price

Level

Output/GDP

AS^1 AS^2

AD^1

AD^2

Part II: Macroeconomics