Everything else constant, inflation Leads to an increase in a country’s net exports. Increases firms’ inventories...

Everything else constant, inflation

Leads to an increase in a country’s net exports.
Increases firms’ inventories below the desired level.
Causes a movement along the aggregate demand curve, while shifting the expenditure line downward.
a and c.
All of the above.

Solutions

Expert Solution

Aggregate demand means demand for a goods or services by all the people in the country. The graphical representation of the AD is aggregate demand curve.

AD= consumption + Investment + Government expenditure + export - Import

The AD is downward sloping and it shows an inverse relationship between price and real GDP.

When everything is held constant and with inflation, there will be a movement along the aggregate demand curve.

AE=C+I+G+X-M

When there is inflation, then real money supply decrease, so the money supply curve shifts leftward, so the interest rate increase, with the increase in the interest rate, investment becomes expensive, so the investment decrease. Therefore the AE line will shift downward.

1. Hence it can be said that everything else constant, inflation Causes a movement along the aggregate demand curve, while shifting the expenditure line downward.

2. Hence option c is the correct answer.

Rahul Sunny answered 1 year ago

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