Question 1

What is aggregate demand?

Accepted Answer

The total demand for goods and services within a particular market

(same as real GDP; C + I + G + Xn)

Question 2

What does the AD Curve measure?

Accepted Answer

The relationship between the price level and the quantity of goods and services demanded

Question 3

What is the relationship between the price level and the AD Curve?

Accepted Answer

As the price level increases, the aggregate quantity of goods and services demanded decreases

Question 4

What is the real wealth effect?

Accepted Answer

The decrease in consumption and investment spending due to a decline in real wealth

Higher price level = less spending

Question 5

What is the interest rate effect?

Accepted Answer

The decrease in consumption and investment spending due to an increase in interest rates at higher price levels

Higher price level = less investment due to higher interest rates

Question 6

What is the exchange rate effect (foreign trade effect)?

Accepted Answer

Lower price levels make an economy's goods more attractive to foreign buyers, increasing exports

Higher price level = less exports

Question 7

What are the three reasons that AD is downward sloping?

Accepted Answer

Real wealth effect

Interest rate effect

Exchange rate effect

Question 8

What causes a shift of the AD curve?

Accepted Answer

Any change in the components of aggregate demand (consumption, investment, government spending, or net exports) that is not due to changes in the price level

3.1 Aggregate Demand, AP Macroeconomics Flashcards