Determine whether each of the following situations would cause a shift of the ag

Question

Determine whether each of the following situations would cause a shift of the aggregate demand curve, a shift of the aggregate supply curve (Long run and Short run), neither, or both. Which curve shifts, and in which direction? What happens to aggregate output and the price level in each case? Is there an expansionary, contractionary, or no gap between the potential output and the actual output? Ishe unemployment rate lower or higher than the natural rate of unemployment. a. Consumer confidence declines. b. The supply of resources increases i.) temporary increase ii.) permanent increase c. The wage rate increases

Explanation / Answer

a. A decline in consumer confidence will mean that consumption will fall as consumers feel less confident. This will cause the aggregate demand curve to shift leftwards and cause a fall in prices and output. This will be a short run phenomena however as over time the economy adjusts itself and moves to long run equilibrium but a lower price level. Given the initial shift in the aggregate demand curve and given that the economy is initially in long run equilibrium this will cause a contractionery gap as the economy moves below potential output. The unemployment rate will also increase above the natural rate as the output declines.

b. i) A temporary increase in resources will mean that over time the aggregate supply will increase and this causes a fall in the price level and an increase in output. Over time the economy adjusts and moves back to equilibrium but at a lower price level. As the economy moves beyond long run equilibrium this will cause a expanionery gap temporarily and increase output beyond the potential level. This will cause unemployment to fall below the natural rate.

ii) A permanent increase in technology will cause the long run aggregate supply curve to shift rightwards and this causes a rise in output and a fall in prices permanently even in the long run. This will cause a shift in long run equilibrium and unemployment to fall to a lower threshold.

c. As the wage rate increases this will cause an increase in the cost of production and so aggregate supply will fall and the aggregate supply curve will shift leftwards and this causes a rise in prices and a fall in output below equilibrium. The economy comes back to long run equilibrium but a higher price level. This causes a contractionery gap and unemployment rises above the natural rate as the economy comes out of long run equilibrium.

Related Questions

Navigate

• Browse (All)
• Browse D
• Subjects

---

---

Integrity-first tutoring: explanations and feedback only — we do not complete graded work. Learn more.