Problem 5 Consider a typical short-run AS/AD model which consists of AD and SRAS

Question

Problem 5 Consider a typical short-run AS/AD model which consists of AD and SRAS ves. In each of the following cases, in the short run, determine whether the events cause a shift of a curve or a movement along a curve. Determine which curve is involved and the direction of the change. (You don't need to draw a graph in this problem. Explain in words.) (1) An increase in the quantity of money by the Federal Reserve increases the quantity of money that people wish to lend, lowering interest rates. (2) Greater union activity leads to higher nominal wages.

Explanation / Answer

1) an increase in money supply is an examle of expansionary fiscal policy.as question suggested an increase in money supply leads to an increase in quantity of money that people wish to lend, lowering the interest rate, with lowering interes rates demand for investmenst will increase, with an increase in investment aggregate output or GDP will also increase at given price level due to which there will be an RIGHTWARD SHIFTin AD curve. SRAS curve will remain unchanged.

2) Due to increase in wage rate SRAS curve will shift to left :- As workers wage is the major part of production cost for firms if there is an incrase in wage rate there will be an direct impact on production cost, due to this higher production cost at any given level of price firm will supply lower amount of output which causes the SRAS curve to shift leftwards.

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