Question 2 Aggregate demand and aggregate supply model ADAS

Question 2: Aggregate demand and aggregate supply model (AD-AS model) State whether each of the following will result in a movement along or a shift in the aggregate demand curve, and in which direction the effect will be. State the intuition for each. a. Households buy more houses as the housing price go down. b. Households buy more houses because they expect a booming housing market in the fut c. The government imposes a higher property tax on houses. 1. Suppose that households expect a booming housing market in the future. 2. What monetary policy tool(s) can the central bank use to prevent a potential housing bubble 3. (Bonus question, 3 points) Illustrate the short-run and the long-run impact of an expected (i.e., to control the housing price in the market)? State the intuition. housing boom on the price level and the output level of the economy in an AD-AS diagram.

Solution

Answer 1.

There is a movement along the demand curve only when the change in quantity demanded is due to the change in the price of the product. When factors other than the price changes there will be a shift in the demand curve.

Part A

Households are buying more houses due to fall in the housing prices. Therefore, there will be a movement along the demand curve. The movement will be downward.

Part B

The expectation of booming housing market is the factor other than price. Therefore there will be a shift in the demand curve. The curve will shift rightward.

Part C

As the government imposing a higher property tax, there will be an upward movement in the demand curve as the price of the houses will get increased.