What are the substitution effects that affect aggregate demand?
What will be an ideal response?
There are two substitution effects that affect aggregate demand and help account for the negative slope of the AD curve. First, an increase in the price level raises the interest rate, which reduces the quantity of real GDP demanded. Second, an increase in the U.S. price level raises the price of U.S. goods relative to foreign goods which also decreases the quantity of U.S. real GDP demanded.
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Does the experience of World War II demonstrate that government budget deficits and surpluses can be used to stabilize aggregate demand?
A) No, because the deficits run during the 1930s did not end the recession. B) No, because the fact that deficits or surpluses can alter aggregate demand does not prove they can stabilize it. C) Yes, because nominal GDP increased by more than the amount of the deficit in each wartime year. D) Yes, because World War II demonstrated the multiplier effect of deficits.
Assuming coffee and tea are substitutes, a rise in the price of coffee will have which of the following effects on the market for tea?
a. A movement up along the tea demand curve. b. A movement down along the tea demand curve. c. A leftward shift in the tea demand curve. d. A rightward shift in the tea demand curve.
Compared with a low benefit reduction rate, a relatively high benefit reduction rate in a cash assistance program:
A. reduces the incentive to work. B. increases the incentive to work. C. does not affect the incentive to work. D. will reduce the incentive to work through the substitution effect but will increase the incentive to work through the income effect.
For price discrimination to work, the young should ________ than/to the old.
Fill in the blank(s) with the appropriate word(s).