Question

With respect to their impact on aggregate demand for the U.S. economy, which of the following represents the correct ordering of the wealth effect, interest-rate effect, and exchange-rate effect from most important to least important?a) wealth effect, exchange-rate effect, interest-rate effect b) exchange-rate effect, interest-rate effect, wealth effect c) interest-rate effect, wealth effect, exchange-rate effect d) interest-rate effect, exchange-rate effect, wealth effect

Answer 1

Answer: D

Explanation:

The correct ordering of the wealth effect, interest-rate effect, and exchange-rate effect from most important to least important is interest-rate effect, exchange-rate effect, wealth effect . In a aggregate demand for the U.S. economy,graphical model that shows the relationship between the price level and spending on real GDP; the AD curve shows that if the price level decreases, then real GDP increases. real GDP that is sensitive to interest rates; for example, if you have to take out a loan to buy a big fancy car, you are more likely to do that if interest rates are low. what occurs when a change in the price level leads to a change in interest rates and interest sensitive spending; when the price level drops, you keep less money in your pocket and more in the bank. That drives down interest rates and leads to more investment spending and more interest-sensitive consumption. sometimes called the foreign purchases effect) when a change in the price level in one country leads to other countries purchasing more of that country’s goods. That makes net exports (and therefore real GDP) increase. If the price level in Maxistan decreases, then its goods are cheaper relative to Jacksonia, which means Maxistan’s exports increase and its real GDP increases. The wealth effects looks into what occurs when a change in the price level leads to a change in consumer spending; this happens because assets have more or less purchasing power. If the price level decreases, then money in your bank account can suddenly buy more stuff, so you feel wealthier and buy more stuff.