The Interest Rate Effect and Real Wealth Effect Are Important

question 195

Multiple Choice

The interest rate effect and real wealth effect are important because they help to explain

• A)why demand management policy cannot be used effectively when aggregate supply shifts to the left.
• B)the downward-sloping nature of the aggregate demand curve.
• C)why equilibrium real GDP rarely coincides with potential real GDP.
• D)why the aggregate demand curve may shift inward or outwarD.
• E)the shape of the aggregate supply curvE.

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Definitions:

Ultimatum Game

A game in experimental economics where two players decide on how to divide a sum of money; one proposes a split, and the other player can accept or reject.

Invisible Hand

A term coined by Adam Smith to describe the self-regulating nature of the marketplace, where individuals pursuing their own interests unintentionally benefit society.

Precommitments

Strategies or commitments made in advance to limit or define future actions or decisions.

Time Inconsistency

Time inconsistency refers to the situation where a decision-maker's preferences change over time, especially in ways that involve a conflict between short-term and long-term interests.