ps6ans - Economics 205: Principles of Macroeconomics Mark...

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Economics 205: Principles of Macroeconomics Mark Moore Fall 2007 Problem Set 6 1. As P increases, the real value of money-fixed assets, which represent a part of household wealth, falls. A fall in real wealth reduces consumption. Money-fixed assets are assets that pay fixed nominal payments. The real value of these payments depends on the price level. We have also mentioned briefly the effect of P on NX. We will return to this issue later in the course. Also, soon we will introduce another, more important reason for the AD curve to slope down. This reason has to do with the financial markets. 2. a. The Z line (NOT the Y=Z line) shifts up, and the AD curve shifts right. b. Output and the price level increase. In the income-expenditure diagram, output increases by the change in investment times the multiplier. In the AD-AS diagram, the AD curve shifts horizontally by the change in investment times the multiplier. As a result the change in the economy’s equilibrium output is less than the change in investment
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This note was uploaded on 02/20/2008 for the course ECON 205 taught by Professor Kamrany during the Fall '07 term at USC.

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ps6ans - Economics 205: Principles of Macroeconomics Mark...

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