Q: The multiplier effect is best described by which formula?

$$\frac{\Delta \text{in real GDP at each price level}}{\text{initial } \Delta \text{in the component of AD}}$$

Question 1

Which of the following best describes the aggregate demand curve?

Accepted Answer

It displays the relationship between the total quantity of goods and services demanded from all major sources in an economy and the price level.

Question 2

Which of the following is NOT a component of aggregate demand?

Accepted Answer

Money Supply

Question 3

Why does the aggregate demand curve slope downward?

Accepted Answer

Because lower price levels decrease the interest rate, increasing investment and net exports.

Question 4

A decrease in the price level leads to which of the following effects on aggregate demand?

Accepted Answer

A movement along the aggregate demand curve due to the wealth, interest rate, and international trade effects.

Question 5

Suppose the government increases its purchases. What happens to the aggregate demand curve?

Accepted Answer

It shifts to the right.

Question 6

During the summer of 2021, the U.S. government increased the child tax credit from $$2000 to 3600 $$per child. What is the most likely impact on aggregate demand?

Accepted Answer

Aggregate demand shifts to the right due to increased consumption.

Question 7

If the price of oil rises from $$82 to 97 $$per barrel and the U.S. imports 80% of its petroleum, which component of aggregate demand is most directly affected?

Accepted Answer

Net Exports

Question 8

Which of the following would cause a shift in the aggregate demand curve rather than a movement along it?

Accepted Answer

A change in consumer confidence leading to increased consumption.

Question 9

The multiplier effect is best described by which formula?

Accepted Answer

$$\frac{\Delta 	ext{in real GDP at each price level}}{	ext{initial } \Delta 	ext{in the component of AD}}$$

Question 10

If an initial increase in investment of $$100 billion leads to a total increase in real GDP of 200 $$billion, what is the value of the multiplier?

Accepted Answer

$$2$$

Question 11

Which scenario would most likely result in a movement along the aggregate demand curve?

Accepted Answer

A decrease in the price level due to deflation.

Question 12

If the interest rate falls, what is the expected effect on aggregate demand?

Accepted Answer

Aggregate demand increases due to higher investment.

Question 13

Which of the following best explains the international trade effect?

Accepted Answer

As domestic prices rise, exports decrease and imports increase.

Question 14

Suppose Lydia's income increases by $$1,000 and total GDP grows by 2$$,900 as a result. What is the multiplier?

Accepted Answer

$$2.9$$

Question 15

Which of the following would NOT cause a shift in the aggregate demand curve?

Accepted Answer

A change in the price level.

Question 16

If the U.S. dollar appreciates relative to other currencies, what is the likely effect on U.S. aggregate demand?

Accepted Answer

Aggregate demand decreases due to lower net exports.

Question 17

Which of the following is an example of the wealth effect?

Accepted Answer

As the price level falls, the real value of money holdings increases, leading to higher consumption.

Question 18

If the change in a component of aggregate demand is $$200$$ billion and the change in real GDP at each price level is $$1000$$ billion, what is the multiplier?

Accepted Answer

$$4$$

Question 19

Which of the following would most likely cause the aggregate demand curve to shift to the left?

Accepted Answer

A decrease in consumer confidence leading to lower consumption.

Question 20

If business investment increases due to lower interest rates, what happens to aggregate demand and why?

Accepted Answer

Aggregate demand increases because investment is a component of aggregate demand.

Aggregate Demand: Determinants, Curve Behavior, and the Multiplier Effect

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