Author Question: What are the flows in the market economy that go from firms to households and the flows from ... (Read 91 times)

dalyningkenk · **on:** Jun 29, 2018

What are the flows in the market economy that go from firms to households and the flows from households to firms?

What will be an ideal response?

Question 2

Explain how the aggregate demand and aggregate supply model can be made more dynamic.

What will be an ideal response?

vish98 · **Reply #1 on:** Jun 29, 2018

Answer to Question 1

On the real side of the economy, goods and services flow from firms to households. On the monetary side of the economy, payments for factors of production, wages, rent, interest, and profits, flow from firms to households. Flowing from households to firms on the monetary side of the economy are the expenditures on goods and services and on the real side are the factors of production, labor, land, capital, and entrepreneurship.

Answer to Question 2

We can make the aggregate demand and aggregate supply model dynamic rather than static by making three changes to the basic model. First, potential real GDP increases continually because the long-run aggregate supply curve continually shifts to the right. This is because workers are continually entering the labor force, technological change occurs, and the economy accumulates machinery and tools. Second, aggregate demand increases during most years. This is because population and income increases over time. Finally, the short-run aggregate supply curve shifts to the right, except for periods of time when workers and firms expect high rates of inflation.