Q.3. In each of the following cases, in the short run, determine whether the eve
ID: 1115096 • Letter: Q
Question
Q.3. 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. a. As a result of an increase in the value of the dollar in relation to other currencies, American producers now pay less in dollar terms for foreign steel, a major commodity used in production b. An increase in the quantity of money by the Federal Reserve increases the quantity of money that people wish to lend, lowering interest rates c. Greater union activity leads to higher nominal wages. d. A fall in the aggregate price level increases the purchasing power of households and firms money holdings. As a result, they borrow less and lend more.Explanation / Answer
(a)
Increase in value of dollar has made the foriegn steel (a major commodity used in production) cheaper for American producers.
This will reduce the cost of production of American producers and would increase their profit-margin.
This will induce US firms to produce more and therefore there will be an increase in aggregate supply in short-run.
So, the given scenario involves short-run aggregate supply curve and will result in a shift in the short-run aggregate supply (SRAS) curve to the right.
(b)
The fall in interest rate due to increase in money supply will reduce the cost of borrowing. This will induce households and businesses to borrow more for consumption and investment spending.
These two are components of aggregate demand. Increase in these two will bring an increase in aggregate demand.
So, the given scenario involves aggregate demand curve and will result in the rightward shift of the aggregate demand curve.
(c)
Higher nominal wages due to greater union activity will increase the labor cost for firms.
This will increase the cost of production of American producers and would decrease their profit-margin.
This will induce US firms to produce less and therefore there will be a decrease in aggregate supply in short-run.
So, the given scenario involves short-run aggregate supply curve and will result in a shift in the short-run aggregate supply (SRAS) curve to the left.
(d)
Aggregate price level and aggregate demand has inverse relationship.
This fall in aggregate price level will induce households to consume more and businesses to invest more as the purchasing power of households is increasing and firms' money holdings increases.
So, the given scenario will involve aggregate demand curve and will result in downward movement along the aggregate demand curve.
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