Why can’t the substitution and income effects be used to explain the downward slope of the aggregate demand curve?
What will be an ideal response?
In terms of the substitution effect, with a single product, a lower price makes the good relatively less expensive compared to other goods. With aggregate demand, a lower aggregate price level lowers the price of all goods and doesn’t make one relatively less expensive compared to another, so the substitution effect isn’t applicable.
For the income effect, for a single product, a decrease in price raises the consumer’s real income—allowing the purchase of more goods. In the case of aggregate demand, a lower price level means less income for producers and suppliers of goods and although goods are less expensive for consumers, the combined effect doesn’t translate necessarily to a higher total income level, so the income effect doesn’t apply.
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The burden of unemployment is
A. endured better by people with substantial savings. B. fully measured by the monetary cost computed in the GDP gap. C. borne equally by all unemployed people. D. completely offset by the federal unemployment insurance program.
On the graph above, unplanned inventory investment occurs if the economy is moving from point ________ to point ________
A) D; C B) C; B C) B; A D) all of the above E) none of the above
Economic profit equals NOPAY plus capital charges
Indicate whether the statement is true or false
How are Treasury bond prices affected when the interest rate falls?
a. The purchaser of the bond needs to spend less money to obtain a given number of dollars of interest per year, so the price of the bond must decrease. b. The purchaser of the bond needs to spend more money to obtain a given number of dollars of interest per year, so the price of the bond must increase. c. The purchaser of the bond needs to spend more money to obtain a given number of dollars of interest per year, so the price of the bond must decrease. d. The purchaser of the bond needs to spend less money to obtain a given number of dollars of interest per year, so the price of the bond must increase.