Introduction
-Aggregate Demand: A schedule or curve that shows the amounts of real output (real GDP) that buyers collectively desire to purchase at each possible price level.
-In other words, AD = C + I + G + NX
-Graphing aggregate demand: A downward sloping curve with the price level on the Y-axis and real GDP (Y) on the X-axis.
-Demand for an individual good or service slopes downward because of the income effect and substitution effect. These don’t apply to the explanation of aggregate demand because we’re talking about price levels, not individual prices. (Substitution effect is based on a similar product being cheaper than another; doesn’t work if everything becomes cheaper when price levels fall. Income levels in general fall as well, so there is no income effect).
-Aggregate demand is downward sloping because of 3 effects: the real balances effect, the interest rate effect, and foreign purchases effect.[break]
Real Balances Effect
Real Balances Effect
-Rising price levels (inflation) decreases the purchasing power of assets with fixed dollar values like savings accounts, bonds, and annuities. This decreased purchasing power means that the public is now poorer, which leads to decreased consumption, which leads to a lower level of aggregate demand (AD (down) = C (down) + I + G + NX).[break]
Interest Rate Effect
Interest Rate Effect
-Assuming a fixed level of money supply, when price levels go up, the demand for money goes up (as people now need more dollars to purchase the same amount of goods). This increase in money demand leads to an increased interest rate. Higher interest rates means that firms now have a smaller portfolio of projects that have a high enough expected rate of return to borrow against, so they will undertake fewer projects and consequently have lower investment spending. At the same time, consumer related purchases that are dependent on interest levels (like buying a home or a car) also decrease because it is now more expensive to purchase the same good. This decrease in consumption and investment spending leads to a lower level of aggregate demand (AD (down) = C (down) + I (down) + G + NX).[break]
Foreign Purchases Effect
Foreign Purchases Effect
-When domestic price levels rise relative to foreign price levels, domestic goods become relatively more expensive and foreign goods become relatively cheaper. This leads to fewer domestic goods being exported and more foreign goods being imported, leading to decreased net exports which lower the level of aggregate demand (AD (down) = C + I + G + NX (down)).

#1 True/False: Reducing unemployment will shift an economy’s production possibilities curve outward.

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#2 How would you graphically determine whether a country is operating at full employment or not?
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#3 What does a straight line production possibilities curve imply?
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#4 True/False: All else equal, if an economy is operating on the PPC, the only way for it to produce more of one good is to give up some of the other.
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#5 A production possibilities curve shows the maximum amounts of two goods that can be produced under what assumptions?
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#6 Why is the production possibilities curve typically concave to the origin (bowed out)? What does this imply about the opportunity cost?
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Refer to this table for questions #7 to #14:
PPM PP - Table 1
#7 Refer to the above table. If the economy is producing at C, what is the opportunity cost of one more unit of X?
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#8 Refer to the above table. If the economy is producing at point C, what is the opportunity cost of one more Y?
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#9 Refer to the table above. If this economy has a total output of 0X and 20Y, what can we infer from this?
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#10 Refer to the table above. What must happen in order for this economy to produce 8X and 18Y?
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#11 Refer to the table above. Without changing the technology available, how might this economy achieve a total output beyond its PPC?
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#12 Refer to the table above. Without graphing, how can we tell if the opportunity cost in this economy is increasing, decreasing, or constant?
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#13 Refer to the table above. If you were to graph this PPC, what would the curve look like?
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#14 Refer to the table above. At which production alternative will this economy produce at?
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#15 Will an economy achieve faster economic growth by producing more consumer goods or more capital goods?
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#16 All else equal, a sudden population decline will likely do what to a production possibilities curve?
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#17 A new piece of machinery is invented that allows us to produce the same number of goods with fewer resources. What is this considered a change in and what will it do to the PPC?
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#18 What does a convex PPC imply? Would this be likely in the real world?
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