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ps6ans-1 - Economics 205 Principles of Macroeconomics Mark...

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Economics 205: Principles of Macroeconomics Mark Moore Fall 2008 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. As output rises, the unemployment rate tends to fall, which tends to increase the wage, which tends to increase the price of goods (because labor costs affect the cost of producing final goods). So, as output rises, so does the price level, and the AS curve slopes up. 3. 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.
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