Question

23.1 The Demand Side of the Economy Close 2 of 9 (2 complete) 0 correct 23.1 Study Exercise 4 (Algo) Question Help For each of the assets listed below, fill in the blanks to show how an exogenous increase in the domestic price level would: (1) affect the wealth of the asset holder, and (2) affect the level of aggregate (private sector) wealth a. The holders of cash would experience a decline in wealth and the level of aggregate (private sector) wealth would decline b. Those holding deposits in a bank account would experience a decline in wealth and the level of aggregate (private sector) wealth would decline c. The holders of household mortgages would experience a decline in wealth and the level of aggregate (private sector) wealth would not change d. Individuals and entities possessing corporate bonds promising to pay bondholders $10,000 on January 1, 2015, would experience a decline in wealth and the level of aggregate (private sector) wealth would not change e. Those holding government bonds that promise to pay the holders $10,000 on January 1, 2015, would experience a decline aggregate (private sector) wealth would decline in wealth and the level of

These answers are already the solution, but I am confused about:

1. Is there any people experience an increase of wealth while the price level is incresing?

2. what is aggregate wealth, can you explain how to get its changing in each question?

Thanks in advance

Answer 1

1 No in normal scenario people will not experience an increase in wealth when the price level is increasing, it is because when price level increases people's purchasing power gets decreased since after price increase they will not be able to purchase the same quantity as before the price increase. Suppose it costs $10 for 10 chocolates, it means each chocolate costs $1 and now suppose after an increase in price from $1 to $2 and then people/purchaser will be able to buy only 5 chocolates and this proves that people will experience decrease in their wealth due to increase in prices.

2 Aggregate wealth is the net worth or net wealth minus liabilities possessed by people of a nation at a certain point of time.

(a) Like in question (a) after increase in price level, people will not be able to purchase same quantity as before the price rise and they will have to pay more at increased price level for getting same level of quantity as before price rise and this will decrease their aggregate(private sector wealth)

(b) Due to rise in price level people will experience decline in their wealth in terms of money deposited into their bank accounts and aggregate(private sector) wealth will also decline since they will be able to buy less goods with that money.

(c) Holders of mortgaged houses will have to spend more on goods and service due to rise in domestic price level and this will decrease their wealth and in long run it will decrease the level of aggregate(private sector) wealth due to increase in household prices in the market.

(d) Corporate bond payment of $10000 to Individuals and entities, maturing on January, 1, 2015 will not decrease aggregate wealth(private sector) in the short run but in long run their aggregate(private sector) wealth will decrease due to decrease in their purchasing power.

(e) Holders of government bonds which matures on January, 1, 2015 will also see decrease in the level of aggregate(private sector) wealth since due to increase in domestic price level people will not be able to buy same quantities of goods and services as before the price rise.