Answer to Question #285047 in Macroeconomics for Jayrick

Question

In the tiny island nation of Bongo, the nation’s wealth is broken down as follows: 50 percent is cash in checking and savings accounts, 25 percent is housing, and 25 percent is stock holdings. Last year, Bongo experienced an inflation rate of 25 percent, and housing prices and stock prices each increased by 10 percent. Explain what happened to real wealth in Bongo last year, and how this change in real wealth helps explain the downward slope of the aggregate demand curve.

Answer 1

Solution:

The real wealth in Bongo decreased since inflation decreases the value of money or the purchasing power of money.

Inflation increases the price of goods and services over time, effectively decreasing the number of goods and services you can buy with a dollar in the future as opposed to a dollar today.

The change in real wealth helps explain the downward slope of the aggregate demand curve because the decline in real wealth leads to​ a decrease in planned aggregate expenditure

and a decrease in consumption since the value of money is reduced and can only purchase fewer items.