Here is the question and the answers. But I need an explanation of WHY the answe
ID: 1188167 • Letter: H
Question
Here is the question and the answers. But I need an explanation of WHY the answer is what it is. Any answers that don't answer why for each one will only get 1 star.
What effects would each of the following have on aggregate demand or aggregate supply? In each case use a diagram to show the expected effects on the equilibrium price level and level of real output. Assume that all other things remain constant.
a. A widespread fear of depression on the part of consumers.
b. A $2 increase in the excise tax on a pack of cigarettes.
c. A reduction in interest rates at each price level.
d. A major increase in Federal spending for health care.
e. The expectation of rapid inflation.
f. The complete disintegration of OPEC, causing oil prices to fall by one-half.
g. A 10 percent reduction in personal income tax rates.
h. A sizable increase in labor productivity (with no change in nominal wages).
i. A 12 percent increase in nominal wages (with no change in productivity).
j. Depreciation in the international value of the dollar.
ANSWERS
(a) AD curve left, output down and price level down (assuming no ratchet effect).
(b) AS curve left, output down and price level up.
(c) AD curve right, output and price level up.
(d) AD curve right, output and price level up (any real improvements in health care resulting from the spending would eventually increase productivity and shift AS right).
(e) AD curve right, output and price level up.
(f) AS curve right, output up and price level down.
(g) AD curve right, output and price level up.
(h) AS curve right, output up and price level down.
(i) AS curve left, output down and price level up.
(j) AD curve right (increased net exports); AS curve left (higher input prices)
Explanation / Answer
a) Fear of a depression will lower demand because people won't want to buy things and will instead save their money. Demand decreases so price decreases.
b) Excise tax will increase the price of a product, so there will be less produced. Supply decreases so price increases.
c) When interest rates decrease, people are more likely to buy (because they can borrow money at lower rates) so demand will increase. Demand increases so price increases.
d) When Federal spending on healthcare increases, perhaps people have to spend less on healthcare and can spend more on other things that make up the aggregrate demand curve. That could be why it increases.
e) Inflation will increase prices and decrease the value of the dollar, so people will be spending more before it hits. Demand will increase and price will increase.
f) If the oil prices fall, there must be more supply than demand, so the supply increased (right) and price decreased.
g) People have more money to spend because it isn't being paid in taxes. The demand for products would go up and the prices would go up.
h) When workers are more productive, they'd be making more supply. Supply would increase and price would decrease.
i) People have more money to spend, but the same amount of goods to spend it on, so the supply would go down and price would go up.
j) The dollar is worth less, so we would be exporting more because people would buy our products because they'd be cheaper. So, demand would increase but supply would decrease because we are exporting so there would be higher prices.