Explain the three reasons given for the downward slope of the aggregate demand curve.
What will be an ideal response?
The three reasons given are the real-balances effect, the interest-rate effect, and the foreign purchases effect.
The real-balances effect refers to the idea that a higher price level will reduce the purchasing power of the population’s accumulated financial assets. Because of the decline in value of such assets, people will feel poorer and will reduce their spending. Conversely, as the price level falls the opposite will occur.
The interest-rate effect assumes that as the price level rises so will interest rates, and rising interest rates will reduce certain kinds of spending such as consumption spending on durable goods and investment spending.
The foreign purchases effect assumes that if the price level rises in the U.S. relative to that in foreign countries, Americans will increase spending on imports at the expense of domestically produced goods and services, and foreigners will reduce purchases of U.S. goods. In other words, net exports decline.
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Why does capital depreciate?
What will be an ideal response?
Hughes and Cain (2011) give some credit to which of the following factors for the 1860–1910 increase in the number of people employed, shorter work days and higher real incomes?
(a) A decrease in the number of immigrants (b) A closed economy with no imports coming into or exports going out of the U.S. (c) Mechanical power and capital accumulation (d) All of the above
The FDIC raises its funds by _____________.
Fill in the blank(s) with the appropriate word(s).
Since 1975, U.S. exports and imports have:
A. grown absolutely but remained a constant proportion of GDP. B. grown absolutely but declined as a proportion of GDP. C. grown both absolutely and as a percentage of GDP. D. declined both absolutely and as a percentage of GDP.