Study the diagram below and answer the questio ns that follow, Initially, the sh
ID: 1133710 • Letter: S
Question
Study the diagram below and answer the questio ns that follow, Initially, the short-run aggregate supply is SRAS1 and aggregate demand is AD. Some events change aggregate demand, and later change aggregate supply. 1. Identify the equilibrium price level and real GDP after the change in aggregate demand. 2. Identify the equilibrium price level and real GDP after the change in aggregate supply 3. Describe two events that could have changed aggregate demand from ADi to AD2 (8 4. Describe two events that could have changed aggregate supply from SRAS1 to SRAS2. Aggregate price level LRAS SRAS2 SRAS1 P3 P2 P1 PO AD2 Y1 Y2 y3 Real GDPExplanation / Answer
Answer : 1) The initial aggregate demand curve is AD1 and initial aggregate supply curve is AS1. Now, according to given diagram the aggregate demand curve change and becomes AD2 remaining other things constant. As a result, the equilibrium price becomes P1 and real GDP becomes Y3.
2) According to given information, after change in aggregate demand the aggregate supply curve change. This means that after getting AD2 aggregate demand curve the supply curve changes and becomes SRAS2. As a result, the equilibrium price becomes P3 and the real GDP becomes Y2.
3) The following two events can change the aggregate demand curve AD1 to AD2.
(i) Increased consumer income : If consumer income increase then consumers spend more on goods and services. As a result, the aggregate demand increase which shifts the AD1 curve to AD2.
(ii) Lower interest rate : If interest rate is low, then people save less and spend more on Consumptions. As a result, the aggregate demand increase which shifts the AD1 curve to AD2.
4) The following two events can change the short run aggregate supply curve SRAS1 to SRAS2.
(i) Increase in labour wage rate and other raw materials : If labour wage rate and other raw material prices increase then the production cost increase. Hence producers reduce the production level which decrease the aggregate supply. As a result, the short run aggregate supply curve shifts from SRAS1 to SRAS2.
(ii) Increase in per unit tax rate : If per unit tax rate increase for production then this increase the production cost. Hence producers decrease the production level which decrease the aggregate supply in the economy. As a result, the short run aggregate supply curve shifts from SRAS1 to SRAS2.