chapter 8

Question 1

How does an increase in P affect private sector wealth

Answer 1

reduces private-sector wealth:
* reduction in desired consumption
* downward shift in AE curve
There is also an effect on net exports:
* the NX function shifts downward
* further downward shift in AE curve
Conversely for a fall in P.

Question 2

Name the two reasons why AD is negatively sloped

Answer 2

1.A fall in the price level leads to a rise in private sector wealth,
which increases desired consumption and thus leads to an increase
in equilibrium GDP.
2.A fall in the price level (for a given exchange rate) leads to a rise in
net exports and thus leads to an increase in equilibrium GDP.

Question 3

The AS curve is drawn for a given:

Answer 3

• level of technology
• set of factor prices
  As unit costs rise with output, firms will produce more output only
  if prices increase:
  è AS curve is upward sloping

Question 4

shocks can be…

Answer 4

expansionary or contractionnary

Question 5

possible causes au AD shocks

Answer 5

change in:
g
i
x
c

Question 6

possible causes of shocks in AS

Answer 6

change in:
- price of inputs
- wages
- technology