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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
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
12A-2
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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:
12A-5
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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).
12A-6
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