Aggregate Demand- Aggregate Supply AS S40 AD e0 Real Output Evaluate each \"head
ID: 1117031 • Letter: A
Question
Aggregate Demand- Aggregate Supply AS S40 AD e0 Real Output Evaluate each "headline." State whether AD or AS is doing the shifting and in which direction. (If AD is causing the shift, make sure to state which component is responsible the C, the Ig, or the G.) State the new equilibrium price level and output. I've done the first one for you. .Starting out in equilibrium where the price level is $60 and real output is 60: 1. Government announces a large increase in spending on health and education. Government spending is a variable of AD. If you tG, then you AD so (Pet, Ye ) When you shift AD to the right the new price level is $80 and the new output level is 80. (If you moved your line out to the next “dot" you could give me a new price of $100 and new output of 100.) The price level (Pe) will be HIGHER, and the real output (Ye) will be HIGHER. Make sure to state both direction and the actual new price/output numbers in your answer as I've done here. Your answer should look like what I've highlighted. 2. Plant capacity is limited causing firms to increase their investment. 3. Crude oil (a resource) prices plummet for 2nd straight quarter (cost of energy is going down). 4. Consumers are pessimistic about the current state of the economy 5. Productivity decreases in the U.S 6. Stock market is BOOMING! (Think about who buys stocks and therefore who this is likely to effect.)Explanation / Answer
In the second case the investment component of aggregate demand is increasing. Hence aggregate demand again shifts to the right and this ensures a new price level of 80 and a new equilibrium real or output at 80.
The cost of energy is a part of cost of production. A fall in the cost of production would induce companies to produce more. This is shifts the aggregate supply curve to the right and this will reduce the price level to 40 and increase the real GDP to 80
When there is a consumer pessimism consumption demand is reduced. Consumption component of the aggregate demand experiences or reduction and therefore aggregate demand shifts to the left. This reduces the price level to $40 and real output at 40
A decline in the productivity will reduce the average production which means aggregate supply curve will shift to the left. This increases the price level to 80 and reduces the output level to 40
When the stock market is booming the wealth of consumers increase. This is called the wealth effect and this will shift the consumption demand. As a result aggregate demand shifts to the right and this increases the price level to reach $80 and output level to reach 80.