Author Question: Explain why the demand for domestic goods curve (ZZ) has a different shape than the domestic demand ... (Read 63 times)

littleanan · **on:** Jun 30, 2018

Explain why the demand for domestic goods curve (ZZ) has a different shape than the domestic demand curve (DD).

What will be an ideal response?

Question 2

If a country experiences persistently low inflation, which of the following tends NOT to occur?

A) wage indexation will become less important
B) nominal wages will be set for shorter periods of time
C) the markup over labor costs will decrease
D) all of the above

steff9894 · **Reply #1 on:** Jun 30, 2018

Answer to Question 1

The marginal propensity to import explains this. As Y increases, C and I will increase causing an increase in DD. Some of this increase in demand is for foreign goods. This must be subtracted from DD to obtain ZZ. So, a given increase in Y will have a larger effect on DD than it will on ZZ.

Answer to Question 2

A