Question

macroeconomics

15 & 16 please

(d) Inflation SHORT ANSWER: TYPE CONCISE ANSWERS BELOW PROMPT. DIAGRAMS, BULLET POINTS, LISTS WILL SUFFICE! 15. Why is the Demand curve downward sloping? Briefly explain ALL the reasons. (4 pts)

Answer 1

Solution 15

Demand curve is downward sloping because of following reasons:

1. Due to income and substitutions effect, increasing income causes increased prices of goods and rise in prices of one good causes lower consumption of that good and higher consumption of other good.
2. Law of demand states that rise in prices causes fall in demand and vice versa.
3. Due to income effect when prices of goods fall real income increases and hence falling prices now creates jigher lurchases pushing the demand higher.
4. New buyers also enter market when prices of goods decrease and thus they buy more and more with falling pricescausing demand to rise.

Solution 16

Sticky prices are those where price fluctuations is negligible and thus is inflexible. Shock is positive or negative which unexpectedly affects the economy. With supply shocks lets say due to earthquake or natural calamity pushes supply of certain goods to plunge and in short run the sticky prices now become flexible as supply js drastically low and alternative in short run is not available. Negative Demand shocks like 2008 recession creates multiplier effects and creates deflation and low employment opportunities as well as sharp plunge in real GDP as well as spending.