1. An increase in the price level will GDP and thereby move the economy the aggregate demand curve.

2. At any price level, the income-expenditure model determines the level of equilibrium output and the corresponding point on the curve.

3. A decrease in the price level will not shift the aggregate demand curve. (True/False)

4. A rightward shift in the aggregate demand curve corresponds to a(n) in equilibrium income.

5. Using Multipliers to Determine the Shift of the Aggregate Demand Curve.

a. Suppose the MPC is equal to 0.8. Government spending increases by $20 billion. How far does the aggregate demand curve shift to the right?

b. Now suppose that the MPC is 0.8 and the marginal propensity to import is 0.2. How far to the right will the $20 billion in government spending shift the aggregate demand curve?

6. Increasing Exports and Aggregate Demand. Suppose foreign countries grow more rapidly than anticipated and U.S. exports also grow.

a. Using the income-expenditure model, first show how the increase in exports will increase U.S. GDP.

b. Using your results in part (a), explain how the aggregate demand curve shifts with the increase in exports.

7. The Size of the Wealth Effect and the Slope of the Aggregate Demand Curve. Suppose the wealth effect is very small; that is, a large fall in prices will not increase consumption by very much. Explain carefully why this will imply that the aggregate demand curve will have a steep slope.