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?
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.
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Consider the market for high-end wine. Statistics show that wealthier families spend a greater proportion of their income on high-end wine than do poorer families. If households' incomes rise substantially during an economic recovery, then we can expect
a. an increased demand for high-end wine. b. an increased supply of high-end wine. c. a lower price for high-end wine. d. the demand curve for high-end wine to shift to the left.
If the U.S. inflation rate increases unexpectedly and government revenues, expenditures, and nominal interest rates remain unchanged:
A. both the U.S. real and nominal budget deficits decreases. B. only the U.S. real budget deficit increases. C. both the U.S real and nominal budget deficits increases. D. only the U.S. real budget deficit decreases.