Image that the mayor has hired you as a consultant to evaluate the increase in aggregate demand in the city where you live. Describe to the mayor one (1) aggregate demand and supply factor that would have the greatest impact on economy of your city.
Income on the aggregate demand and productivity on the supply side would have the greatest impact on the economy of our city.
As the purchasing power of our money changes the aggregate demand curve is affiected in three ways.
1. Wealth Effect--As the increase in spending that occurs because the
real value of money increases when the price level falls is konwn as the
wealth effect. The lower the prices are the higher the levels of wealth
and the higher the level of wealth it increases spending on total goods
and services. When the level of prices rise, consumer spending
decreases because the real value of money decreases and consumers just
can't simply substitute one for another because when level of prices
rise everything is more expensive.
2. The Interest Effect-- Based on a given supply of money in the
economy, a lower price level wil lead to lower interest rates. When
rates are lower both consumers and firms will find it cheaper to borrow
money to make purchases. However, when this happens, a demand for goods
ijn ther economy will increase.
3. The International Trade Effect-- In an open economy, a lower price
level will mean that domestic goods become cheaper relative to foreign
goods , so the demand fordomestic goods will increase. For example,
when the price level for goods in the US drops, it will make U. S. goods
cheaper relative to foreign goods.
Feb 25th, 2015
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