A) Will the aggregate quantity of goods and services demanded become more sensit

Question

A) Will the aggregate quantity of goods and services demanded become more sensitive or less sensitive to changes in the price level if an economy becomes closed (that is, as foreign trade disappears)? In terms of the AD/AS diagram, will the AD curve become steeper or flatter?

B) There is an increasing trend of globalization in the world, part of which is manifested in credit and input markets. It could be argued that this will cause interest rates to be determined in international credit markets rather than in national credit markets, and most small, national fluctuations will have no effect. How might this change the relationship between the aggregate quantity of goods and services demanded and the price level in a nation's economy? That is, In terms of the AD/AS diagram, will the AD curve become steeper or flatter?

C) Now, consider that many people have become more sophisticated in their financial dealings. Instead of holding cash or assets such as checking or savings deposits (which are basically the same as cash), they keep their wealth in assets whose value will NOT generally change with the price level. How might this change the relationship between the aggregate quantity of goods and services demanded and the price level in an economy? That is, In terms of the AD/AS diagram, will the AD curve become steeper or flatter?

Explanation / Answer

(A) The AD curve will shift parallely downwards, hence there will be a decreased demand for goods and services at each price level but the slope of AD curve will remain the same.

(B) The AD curve will become steeper, hence the relation between the price level and the aggregate quantity will be less sensitive.

(C) The AD curve will become steeper, hence the relation between the price level and the aggregate quantity will be less sensitive.

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