Reference no: EM132830837

There are the three reasons why aggregate demand is downward slope: real wealth effect, interest rate effect, exchange rate effect. In a case scenario the market saw an increase in consumer spending when there is a boom in economy. Or the economic crisis makes the public bit shy to buy or consume any product. In the above two situations: the transfer payment does not make the part of government spending as the public will spend the money given as self-security and unemployment. Export situation gets worse as the foreigners are reluctant to buy expensive goods and the government will make some imports. The borrowing has become easy and loans are issued at a cheaper rate to buy car.

Following the equation: Y = C + I + G + NX will the below examples increase or decrease the aggregate demand in Pakistan? What will be the shift in position for below situations?

A. Widespread fear of recession

B. The appreciation in the Pakistani Rupee rate

C. A boom in the stock market

D. An increase in transfer payment

E. A decrease in real interest rate in Pakistan .

How would you define price stickiness? How does this phenomenon lead to an increase in the short run level of output according to the Keynesians? Comment