Question

1- how is price set in the goods market ?

2- How does an expected increase in wealth change demand in the long run, short run?

3- How does an expected increase in wealth change your demand  and your saving rate?

Answer 1

1) In the goods market people demand goods and producers supply goods . The quantity supplied is different at different price levels and so the quantity demanded . This interaction of demand and supply causes the market to reach equilibrium, where the market clears at a certain price level or quantity demanded is equal to quantity supplied . This is the equilibrium price reached by the interaction of supply and demand forces . Price is set in goods market primarily based on this .

2) Expeceted increase in wealth will increase aggregate demand in short run . The short run demand curve shifts right . But in long run prices will adjust to cause inflation , so the real value of wealth is likely to fall . So demand in long run remains unaltered .

3) An expected increase in wealth reduces savings rate . This is because people's propensity to consumer or demand increases .