Explain the real balance effect.
Explanation of Solution
Figure-1:
Figure-1 shows the aggregate demand curve with different
In figure-1, the vertical axis measures the price level and the horizontal axis measures the real
If the price level decreases, then the
If the price level increases, then the purchasing power will decrease and this decreases the person’s monetary wealth. When an individual becomes less wealthy, they will consume less goods and services, and this causes a decrease in the real GDP.
Want to see more full solutions like this?
Chapter 8 Solutions
MindTapV2.0 Macroeconomics, 1 term (6 months) Printed Access Card, 12th (MindTap Course List)
- For each of the following, please explain each step and show it in the graph! c) Assume an economy is at full employment, but then supply falls in the short run. What will happen in the long run if the policymakers do nothing and what will happen in the long run if the policy makers influence aggregate demand with monetary policy to drive back to the natural output?arrow_forwardName a couple of “players” in the monetary supply process.arrow_forwardShould Monetary and Fiscal Policymakers Try to Stabilize the Economy? Explain.arrow_forward
- How do changes in aggregate demand and aggregate supply might cause inflation in the economy?arrow_forwardExplain whether policy makers should be more concerned about the economy going into a recession or facing high inflation and why.arrow_forwardWhat role, if any, does monetary policy play in the Real Business Cycle Model?arrow_forward
- Explain what are the lags in macroeconomic policies. Do these lags have more effect on monetary policy or fiscal policy and why?arrow_forwardCan we print as much money to increase consumer spending and allow the aggregate to shift to the rightarrow_forwardIs monetary policy effective in combating stagflation?arrow_forward
- What can be used to reduce aggregate demand and helps to control demand pull inflation?arrow_forwardWhat can be used to reduce aggregate demand and thereby control demand pull inflation? One wordarrow_forwardOn a graph, show the impact of the permanent supply shock on unemployment and inflation in the long run and in the short run.arrow_forward
- Economics (MindTap Course List)EconomicsISBN:9781337617383Author:Roger A. ArnoldPublisher:Cengage LearningEconomics Today and Tomorrow, Student EditionEconomicsISBN:9780078747663Author:McGraw-HillPublisher:Glencoe/McGraw-Hill School Pub Co