How does a change in the price level alter aggregate spending or consumption, investment and net...

How does a change in the price level alter aggregate spending or consumption, investment and net exports in particular? How do changes in the price level create an aggregate demand curve?

Expert Solution

Effects of changes in price level:

Aggregate spending/consumption - Price level has an inverse relation with this. When price falls, people consume more goods and services. Similarly, a rise in price level would result in a fall in aggregate consumption.

Investment: When prices falls, usually the interest rate also falls. A fall in interest rate results in an increase in investment rate. Increase in invesment implies a rise in output, income and employment.

Net exports: Just like low prices are attractive to domestic buyers, they are also attractive to international buyers. Therefore, exports will rise and imports will fall (domestic users will also shift to domestically produced goods rather than expensive imported goods). Therefore, net exports will rise.

Aggregate demand curve: Since all the three factors stated above share an inverse relation with price level, all of them combined form the aggregate demand curve which is a downward sloping curve. With an inrease in price level, the output falls and with a fall in price level, the output increases.

Rahul Sunny answered 2 years ago

Let: C = consumption, Ip = investment spending (as a function of price level), G =...

Let: C = consumption, Ip = investment spending (as a function of price level), G = government spending, Tx = tax revenue, Yd = after-tax income, Assume for a given closed economy: C=100 + 0.9 Yd – 20P Ip= 400 – 40P G=300 T=100 Moreover, aggregate supply curve for this economy is defined by the following equation: P=1.41 + 0.0001Y a. According to the investment equation (Ip= 400 – 40P) as overall price level in the economy increases investment spending...

How do consumption and investment spending affect aggregate expenditures and output over the business cycle? Which...

How do consumption and investment spending affect aggregate expenditures and output over the business cycle? Which is more responsible for volatility - consumption or investment spending or both? Explain your choice. How do government actions affect consumption and investment? 300 word response

Explain each in-depth and why. How do consumption and investment spending affect aggregate expenditures and output...

Explain each in-depth and why. How do consumption and investment spending affect aggregate expenditures and output over the business cycle? Which is more responsible for volatility - consumption or investment spending or both? How do government actions affect consumption and investment?

How does a change in price or a change in income affect the optimal consumption bundle?...

How does a change in price or a change in income affect the optimal consumption bundle? For example, if the substitution effect outweighs the income effect, how does the optimal consumption bundle change?

In the Keynesian AE model, if the autonomous components of consumption, investment, government spending, and net...

In the Keynesian AE model, if the autonomous components of consumption, investment, government spending, and net export spending total $250 billion, and the MPS is 0.25, what will unplanned changes in inventory be when output is $1.010 trillion? $4 billion –$4 billion –$5 billion $5 billion If real output is currently less than the natural level of real output, which of the following will result from an increase in aggregate demand? It will make the current recessionary gap smaller. It...

1. In which situation does investment spending decrease? A.when the price level rises, causing interest rates...

1. In which situation does investment spending decrease? A.when the price level rises, causing interest rates to fall B.when the price level falls, causing interest rates to fall C.when the price level rises, causing interest rates to rise D.when the price level falls, causing interest rates to rise 2. If a central bank targets the interest rate, what does this imply? A. The central bank must decrease the money supply if the interest rate is above its target. B. The...

Using the Spending Approach, determine whether each of the following is Consumption, Investment, Government Purchases, Net...

Using the Spending Approach, determine whether each of the following is Consumption, Investment, Government Purchases, Net Exports, or not included in GDP, and briefly explain why. (a) A yoga studio purchases new yoga mats and straps. (b) An individual purchases a new yoga mat and straps for their home practice. (c) Someone receives a stimulus check from the government in the mail during COVID-19. (d) A public high school purchases new textbooks for its students. (e) A campus bookstore increases...

A change in the expected price level shifts the short-tun aggregate supply curve, but not the...

A change in the expected price level shifts the short-tun aggregate supply curve, but not the long-run aggregate-supply curve ?

How this would change interest rate, investment, AD, GDP, Unemployment and price level?

Assume COVID-19 causes people to keep more cash in checking accounts rather than financial markets. How this would change interest rate, investment, AD, GDP, Unemployment and price level?

Aggregate expenditure equals: A) Consumption + Investment + Government purchases + Transfers B) Consumption + Investment...

Aggregate expenditure equals: A) Consumption + Investment + Government purchases + Transfers B) Consumption + Investment + Government purchases + Net exports C) Consumption + Investment + Federal government purchases + Exports D) Consumption + Government purchases – Net exports As the real interest rate rises: I. consumption rises. II. net exports fall. III. investment rises. A) II only B) I only C) I and III D) III only When the real interest rate rises in the United States, there...

Question