Page 220 - Krugmans Economics for AP Text Book_Neat

Tackle the Test: Multiple-Choice Questions
1. Which of the following explains the slope of the aggregate 3. The Consumer Confidence Index is used to measure which of
demand curve? the following?
I. the wealth effect of a change in the aggregate price level a. the level of consumer spending
II. the interest rate effect of a change in the aggregate price b. the rate of return on investments
level c. consumer expectations
III. the product-substitution effect of a change in the d. planned investment spending
aggregate price level e. the level of current disposable income
a. I only
4. Decreases in the stock market decrease aggregate demand by
b. II only
decreasing which of the following?
c. III only
a. consumer wealth
d. I and II only
b. the price level
e. I, II, and III
c. the stock of existing physical capital
2. Which of the following will shift the aggregate demand curve to d. interest rates
the right? e. tax revenues
a. a decrease in wealth
5. Which of the following government policies will shift the
b. pessimistic consumer expectations
aggregate demand curve to the left?
c. a decrease in the existing stock of capital
a. a decrease in the quantity of money
d. contractionary fiscal policy
b. an increase in government purchases of goods and services
e. a decrease in the quantity of money
c. a decrease in taxes
d. a decrease in interest rates
e. an increase in government transfers
Tackle the Test: Free-Response Questions

1. a. Draw a correctly labeled graph showing aggregate demand.
1 point: Downward sloping curve labeled “AD” (or “AD 1 ”)
b. On your graph from part a, illustrate an increase in
aggregate demand. 1 point: AD curve shifted to the right
c. List the four factors that shift aggregate demand.
1 point: Expectations
d. Describe a change in each determinant of aggregate
demand that would lead to the shift you illustrated in 1 point: Wealth
part b. 1 point: Size of existing stock of physical capital
1 point: Government policies
Answer (12 points)
1 point: Consumers/Producers more confident
Aggregate
price 1 point: Increase in wealth
level Increase in
Aggregate 1 point: Lower existing stock of physical capital
Demand
1 point: An increase in government spending or in the money supply

2. Identify the two effects that cause the aggregate demand curve
to have a downward slope. Explain each.

AD 1 AD 2

Real GDP

1 point: Vertical axis labeled “Aggregate price level” (or “Price level”)
1 point: Horizontal axis labeled “Real GDP”

178 section 4 National Income and Price Determination