Matthew_McCoy_Week_6_Chapter_29_Assignment

Matthew_McCoy_Week_6_Chapter_29_Assignment - Matthew McCoy...

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Matthew McCoy ECON201 Week 6 Chapter 29 Assignment July 15, 2011 Professor John Volpe 1. Why is the aggregate demand curve downsloping? Specify how your explanation differs for the explanation for the downsloping demand curve for a single product. What role does the multiplier play in shifts of the aggregate demand curve? When the economy moves down its aggregate demand curve, it moves to a lower general price level. But when consumers pay lower prices for goods and services, less nominal income flows to resource suppliers in the form on wages, rents, interest, and profits. As a result, a decline in the price level does not necessarily mean an increase in the nominal income of the economy as a whole. Thus, a decline in the price level need not produce an income effect, where more output is purchased because lower nominal prices leave buyers with greater real income (McConnell, This explanation is not the same as that for why the demand for a single product slopes downward. That explanation centered on the income effect and the substitution effect. When the price of an individual product falls, the consumer’s (constant) nominal income allows a larger purchase of the product (the income effect). And, as price falls, the consumer wants to buy more of the product because it becomes relatively less expensive than other goods (the substitution 2. Distinguish between “real-balances” effect and “wealth effect,” as the terms are used in this chapter. How does each relate to the aggregate demand curve? A change in the price level produces a real-balances effect. Here’s how it works: A higher
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Matthew_McCoy_Week_6_Chapter_29_Assignment - Matthew McCoy...

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