4) Given that people expect rate of inflation as 3 % but the
price increases by 5%. Lets have a look at how this might impact on
the following
- a homeowner with a fixed-rate mortgage will have a positive
impact. This means that it helps these groups as
inflation as 3% and price increases to 5%. This is because the
interest rate depends only on inflation.
- a union worker with a fixed labour contract gets
hurt because the worker will receive lesser real
wage due to inflation.
- a company that has invested some of its endowment in government
bonds which pays a fixed rate of return gets hurt.
This is because the increase in inflation causes a lesser interest
rate to be gained.
5) Lets see how the following events would affect the aggregate
demand AD curve
- A short-run decrease in the price level will impact downward
movement along the AD curve since price level and quantity are
inversely proportional. that means AD is downward slopping.
- An increase in consumer confidence on the price level and real
GDP, spending will increase. Hence the AD will increase and this
shows a right shift in AD curve.
- an increase in government purchases motivates employment rate
to increase hence income rises. Then the AD shifts right as AD
increases.
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