A Fall In The Price Level

Question: Why is it incorrect to think that a fall in price level leads to an increase in consumption because demand curves are negatively sloped?

Answer: This is incorrect in the context of an aggregate model. The relatioshpi between price level and desired consumption relates to how changes in price level lead to changes in household wealth and desired spending.

Question: What is the effect of a price level increase on real value of money?

Answer: Increases in price level correspond to reductions in the real value of money— because goods are more expensive, the same nominal amount of money buys less.

Question: How does price level relate to value of other nominal assets?

Answer: Increases in price level lower the value of all assets that have a fixed (nominal) value.

Question: How do changes in the price level change the wealth of bondholders and bond issuers?

Answer: Such changes may redistribute wealth more to holders (lowered price level increases value of money when paid back) or to issuers (higher price level decreases the value the issuer must pay back), but the net change in wealth among the two groups is 0.

Question: How does the domestic price level affect the net export function?

Answer: Increases in domestic prices in relation to foreign ones will increase imports and reduce the net export function. This reduces AE function and a reduction in equilibrium real GDP.

Question: How are the price level and equilibrium GDP related?

Answer: They are negatively related to each other.

Question: Aggregate Demand Curve

Answer: A curve whose points represent combinations of real GDP and price level that make desired AE equal to national income.

Question: Why is a micro demand curve negativel slowed?

Answer: As the price of the commodity falls, purchasing power of consumer’s income rises and the rise in real income results in more units being purchased. As the price of a commodity falls, more of that commodity is bought compared to more expensive ones.

Question: Why is the macro demand curve negatively slowed?

Answer: A fall in price level increases private sector wealth and consumption, and therefore an increase in equilibrium GDP. A fall in price level increases net exports (less imports) and thus increases equilibrium GDP.

Question: Aggregate Demand Shock

Answer: