Week 12: price indices

Question 1

Aggregate Demand

Answer 1

• is the relationship between the general price level and real expenditures (i.e. total spending) in an economy
• as inflation/price levels go up economy shrinks and vice versa
• is shown as a schedule or curve

Question 2

Inflation and wages

Answer 2

when inflation goes up and no wage increase that means you have less spending/purchasing power

Question 3

Wealth effect

Answer 3

• means that higher prices decrease the real value of financial assets and decrease consumption, since households feel poorer (and vice versa for lower prices)
• when people stop spending less bc of inflation then companies start making less

Question 4

Foreign trade effect

Answer 4

means that higher prices decrease exports and increase imports (and vice versa for lower prices)

Question 5

4 Aggregate Demand Factors

Answer 5

• consumption (C)
• investment (I)
• government purchases (G)
• net exports (X - M)

Question 6

Consumption (C)

Answer 6

• disposable income
• wealth (other than wealth changes caused by a varying price level)
• consumer expectations
• interest rates

Question 7

Investment (I)

Answer 7

• interest rates
• business expectations

Question 8

Net exports (X - M)

Answer 8

• foreign incomes (Canada and US are interdependent)
• exchange rates (cheaper to buy in Canada now)