978-0077660772 Chapter 12 Appendix

Chapter 12 Appendix

McConnell Brue and Flynn 20e

DISCUSSION QUESTIONS

1. Explain carefully: “A change in the price level shifts the aggregate expenditures curve but not

the aggregate demand curve.” LO7

Answer: A change in the price level does not shift the aggregate demand curve.

It simply represents a movement along the curve, because there is an inverse

2. Suppose that the price level is constant and that investment decreases sharply. How would you

show this decrease in the aggregate expenditures model? What would be the outcome for real

GDP? How would you show this fall in investment in the aggregate demand–aggregate supply

model, assuming the economy is operating in what, in effect, is a horizontal section of the

aggregate supply curve? LO7

Answer: A decrease in investment spending represents a decrease in aggregate

expenditures and a downward shift in the aggregate expenditures curve. The

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AE

P

Y

P1

Q1

AE1 (P1)

AS

AD1

AE2 (P1)

AD2

Q2

Chapter 12 Appendix

REVIEW QUESTIONS

1. True or False: A higher price level increases aggregate expenditures. LO7

Answer: False

Feedback: This statement is false because a higher price level decreases (rather than

increases) aggregate expenditures. A higher price level reduces aggregate expenditures in

three ways. First, a higher price level reduces the real purchasing power of people’s

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Chapter 12 Appendix

2. If the government decreases expenditures, the AE curve will shift _______ and the AD curve

will shift _______. LO7

a. Down; left.

b. Down; right.

c. Up; left.

d. Up; right.

Answer: a. Down; left

Feedback: The correct answer is that if the government decreases expenditures, the AE

curve will shift down and the AD curve will shift left. The AE curve will shift down

PROBLEMS

1. Refer to Figure 1a and 1b in the Appendix. Assume that Q1 is 300, Q2 is 200, Q3 is 100, P3 is

120, P2 is 100, and P1 is 80. If the price level increases from P1 to P3 in graph (b), in what

direction and by how much will real GDP change? If the slopes of the AE lines in Figure 1a are .8

and equal to the MPC, in what direction will the aggregate expenditures schedule in Figure 1a

need to shift to produce the previously determined change in real GDP? What is the size of the

multiplier in this example? LO7

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Chapter 12 Appendix

Feedback:

Real GDP will fall (movement along the AD schedule and a shift downward of the AE

example?

The first step is to determine the multiplier for this problem. Given the MPC is 0.8 the

Real GDP decreases, which implies the AE schedule must fall (to AE3 at P3).

Change in AE = change in real GDP/multiplier

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Chapter 12 Appendix

2. Refer to Figure 2 in the Appendix and assume that Q1 is $400 and Q2 is $500, the price level is

stuck at P1, and the slopes of the AE lines in Figure 2a are .75 and equal to the MPC. In what

direction and by how much does the aggregate expenditures schedule in Figure 2a need to shift to

move the aggregate demand curve in Figure 2b from AD1 to AD2? What is the multiplier in this

example? Given the multiplier, what must be the distance between AD1 and the broken line to its

right at P1? LO7

Feedback:

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Chapter 12 Appendix

First, we note that the change in output is an increase of $100 (Q2 – Q1 = $500 – $400).

= 4).

Thus, the AE curve must increase by $25 since the total decrease in output is $100.

Rearranging this equation,

Change in AE = change in real GDP/multiplier

Using the values above, the change in AE equals $100/4 = $25.

Given the multiplier, what must be the distance between AD1 and the broken line to its

right at P1?

This distance is the initial shift following the increase in expenditure by $25 (the shift in

the AE curve). Thus, the answer is $25 (this is before the multiplier process works its way

through the economy).

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