Macro Unit 3 3.1- Aggregate Demand Practice Part 1 - Practice- For each of the following situations, identify the determinant (shifter) and indicate if the aggregate demand (AD) would most likely increase, decrease, or not change. Situation 1. Congress cuts personal income taxes by $20 million. Determinant of AD Change in AD C Increase 2. Interest rates increase causing a decrease in capital stock I Decrease 3. Consumer confidence declines and people fear a recession. C Decrease 4. Stock market collapses causing the loss of millions of dollars of assets. C 5. The price level increases by 5%. Does not change Decrease Does not change 6. Defense spending is increased due to military conflicts abroad. G Increase 7. The government raises taxes and cuts spending in attempt to balance its budget. G and C Decrease 8. Future business expectations are predicting growth for most US industries. I Increase 9. Interest rates decrease from 5% to 2%. C and I Increase 10. Incomes increase for US trading partners Canada and China. Increase Xn Part 2 - Draw It- For the following scenarios, show the effect on aggregate demand. 11. Government spending decreases 12. The stock market skyrockets Price Level Price Level AD1 AD2 AD2 AD1 GDPR GDPR Aggregate demand decreases Aggregate demand increases Video Help: https://goo.gl/7KpXRG Do not post online © Copyright Jacob Clifford, ACDC Leadership, 2018 Macro Unit 3 3.1- Aggregate Demand Practice 13. Canadians buy more American-made cars Price Level Aggregate demand increases 14. Lower interest rates affect investment Price Level Aggregate demand decreases AD1 AD2 AD1 GDPR AD2 GDPR Part 3 - Making Connections- Read the quote regarding the Great Recession and answer the questions. “...these events have...destroyed jobs, hamstrung economic growth and led to sharp declines in the values of many homes and businesses. The best and most comprehensive solution is to find ways to a stronger economy…only a strong economy will allow people who need jobs to find them.” -Ben Bernanke, Chairman of the Federal Reserve (2012) 15. What most likely happened to aggregate demand in the US to cause the Great Recession? Use specific words or phrases from the quote above to support your answer. Aggregate demand would decrease we can tell this due to the use pf quotes like - "destroyed jobs, hamstrung economic growth and led to sharp declines in the values of many homes and businesses." 16. The Federal Reserve has the power to manipulate interest rates. Do you think that Ben Bernanke recommended higher interest rates or lower interest rates to create a “stronger economy”? Explain your reasoning. He recommended lower interest rates because it pushes consumers and businesses to loan which then causes and increase in consumption and investment Part 4 - Stretch Your Thinking17. The wealth effect, interest-rate effect, and exchange-rate effect all help explain why the aggregate demand curve is downward sloping. Phyllis, a fellow student in your AP Macro class, suggests that the substitution effect that you learned about in Unit 1 also explains why aggregate demand curve is downward sloping. She reasons that since it explains why a market demand curve is downward sloping, it must also be valid for aggregate demand. Explain why Phyllis is wrong. Replacing a product with another still is included in the overall aggregate demand as AD is the demand of every single product in a country's economy. Video Help: https://goo.gl/7KpXRG Do not post online © Copyright Jacob Clifford, ACDC Leadership, 2018
