Each of the events listed will shift either Aggregate Demand or Short-Run Aggreg

Question

Each of the events listed will shift either Aggregate Demand or Short-Run Aggregate Supply. Match each event with its result.

Question

1.The government raises taxes and cuts its own spending in order to reduce its budget deficit

2.Planned Investment rises.

3.Commodity prices fall

4.Labor productivity falls while nominal wages stay the same

5.Exports rise while imports stay constant.

6.Nominal wages rise while productivity stays the same.

All Answer Choices A. Aggregate Demand shifts to the left. B. Aggregate Demand shifts to the right. C. Short Run Aggregate Supply shifts down and to the right. D. Short Run Aggregate Supply shifts up and to the left.

Explanation / Answer

For questions 1, 2 and 5: Y = C + I + G + NX

1) The government raises taxes and cuts its own spending in order to reduce its budget deficit - Aggregate Demand shifts to the left (Option A, this is because Government expenditure 'G' decreases)

2) Planned Investment rises - Aggregate Demand shifts to the right (Option B, this is because planned investment 'I' increases)

3) Commodity prices fall - Short Run Aggregate Supply shifts down and to the right. (production costs decrease, Option C)

4) Labor productivity falls while nominal wages stay the same - Short Run Aggregate Supply shifts up and to the left (production costs increase, Option D)

5) Exports rise while imports stay constant - Aggregate Demand shifts to the right (Option B, this is because Net exports 'NX' increases)

6) Nominal wages rise while productivity stays the same - Short Run Aggregate Supply shifts up and to the left (production costs increase, Option D)

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