Question

In: Economics

Indicate what happens, in the short run, to the aggregate demand curve (shift right or left),...

Indicate what happens, in the short run, to the aggregate demand curve (shift right or left), real GDP (increase or decrease), and the price level (increase or decrease) in each of the following cases:
a) The interest rate rises,
b) Wealth falls,
c) The dollar depreciates relative to foreign currencies,
d) Households expect lower prices in the future
e) Business taxes rise.

Solutions

Expert Solution

a) interest rate rises:

Increase in interest rate decreases investment spending and thus aggregate demand
Aggregate demand curve - shifts left
Real gdp- decreases
price level- decreases

b) wealth falls:

Decrease in wealth decreases consumption spending and thus aggregate demand.

Aggregate demand curve - shifts left

Real gdp- decreases

Price level - decreases.

c) dollar depreciates :
Depression makes domestic goods cheaper which increases net exports.
Aggregate demand curve - shifts right
Real gdp- increases
Price level - increases


d) households expect lower prices:

Expectation of lower price decreases current consumption and thus aggregate demand.

Aggregate demand curve - shifts left

Real gdp- decreases

Price level - decreases

e) business tax increases:

Increase in business tax decreases investment and thus aggregate demand.

Aggregate demand curve - shifts left

Real gdp - decreases

Price level - decreases

Rahul Sunny answered 6 months ago
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