Refer to the graph to the right. A fall in the domestic price level private sect

Question

Refer to the graph to the right. A fall in the domestic price level private sector wealth. This leads to a in desired consumption, and shift in the AE curve. Similarly, a rise in the domestic price level makes Canadian goods more expensive, resulting in shift in the net export function, which causes shift in the AE curve. Use the line drawing tool to show and label the effect of a fall in the domestic price level on the AE function. Carefully follow the instructions above, and only draw the required object

Explanation / Answer

a) A fall in domestic price level will lead to increase of private sector wealth. This leads to a increase in desired income and upward shift of AE curve

fall in domestic price will lead to increase of real value of private sector wealth, leading to increase in consumption and upward shift of AE curve

b) Similarly, a rise in the domestic price level makes canadian goods more expensive, resulting in leftward shift in the net export function, which causes downward shift in the AE curve

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