ECS1601
ECS1601 ASSIGNMENT 4 SOLUTIONS SEMESTER 2
2020
ECS1601
ASSIGNMENT 4
SOLUTIONS
SEMESTER 2 2020
, ECS1601 ASSIGNMENT 4 SOLUTIONS SEMESTER 2 2020
UNIQUE NUMBER: 840108
4.1 The aggregate demand curve shows the…
[1] negative relationship between the price level and the levels of real output demanded
by households, firms, the government and the rest of the world.
[2] positive relationship between the price level and total production by firms, households,
and the rest of the world.
[3] total levels of output which will be supplied to the domestic and international economies
at different price levels.
[4] negative relationship between the price of goods or service and the quantity demanded
of that good or service.
Explanation & illustration: An aggregate demand curve (AD) shows the relationship between the total quantity of
output demanded (measured as real GDP) and the price level (measured as the implicit price deflator)
4.2. How would an increase in the price level affect real wealth and aggregate demand?
[1] Real wealth will increase; aggregate demand will decrease.
[2] Both real wealth and the quantity of aggregate demand will decrease.
[3] Real wealth will remain the same; aggregate demand will increase.
[4] Both real wealth and the quantity of aggregate demand will increase.
Explanation: The intuition behind the real wealth effect is that when the price level decreases, it takes less
money to buy goods and services. The money you have is now worth more and you feel wealthier. So, in
response to a decrease in the price level, real GDP will increase.
2
ECS1601 ASSIGNMENT 4 SOLUTIONS SEMESTER 2
2020
ECS1601
ASSIGNMENT 4
SOLUTIONS
SEMESTER 2 2020
, ECS1601 ASSIGNMENT 4 SOLUTIONS SEMESTER 2 2020
UNIQUE NUMBER: 840108
4.1 The aggregate demand curve shows the…
[1] negative relationship between the price level and the levels of real output demanded
by households, firms, the government and the rest of the world.
[2] positive relationship between the price level and total production by firms, households,
and the rest of the world.
[3] total levels of output which will be supplied to the domestic and international economies
at different price levels.
[4] negative relationship between the price of goods or service and the quantity demanded
of that good or service.
Explanation & illustration: An aggregate demand curve (AD) shows the relationship between the total quantity of
output demanded (measured as real GDP) and the price level (measured as the implicit price deflator)
4.2. How would an increase in the price level affect real wealth and aggregate demand?
[1] Real wealth will increase; aggregate demand will decrease.
[2] Both real wealth and the quantity of aggregate demand will decrease.
[3] Real wealth will remain the same; aggregate demand will increase.
[4] Both real wealth and the quantity of aggregate demand will increase.
Explanation: The intuition behind the real wealth effect is that when the price level decreases, it takes less
money to buy goods and services. The money you have is now worth more and you feel wealthier. So, in
response to a decrease in the price level, real GDP will increase.
2
