9. What effects would each of the following have on aggregate demand or aggregat
ID: 1118671 • Letter: 9
Question
9. 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 large purchase of U.S. wheat by Russia c. A $1 increase in the excise tax on cigarettes d. A reduction in interest rates at each price level. e. A major cut in Federal Spending for health care g. The complete disintegration of OPEC, causing oil prices to fall by one-half h. A 10 percent reduction in personal income tax rates i. An increase in labor productivity j. A 12 percent increase in nominal wages (with no change in productivity) k. Depreciation in the international value of the dollar L. A sharp decline in the national incomes of our western European trading partners m. A sizeable increase in U.S. immigrationExplanation / Answer
a). A fear of depression amongst consumers will essentially lead to increased demand for products because consumers would want to stock as much of food as possible. Thus the demand curve will shift to the right, the current prices for food will increase, and the output level will also increase.
b). Large purshase of US wheat by Russia will have no affect on either of the curves, unless this supply creates a shortage in USA, which we assume will not be the case.
c). An increase in tax on cigarettes will shift the demand curve to the left, bringing down the price levels and output levels in the economy for cigarette.
d). A reduction in interest rate would mean increased demand for money to produce commondities, as consumers would want to substitute low interest bonds with their current consumption. Thus the demand curve will shift to the right, and price levels will increase.
e). A cut in Funding by Fed will shift the demand curve to the left, bringing down price levels and output levels in the economy. We assume that since is an essential commodity, and thus when there is a reduced spending on Health by the Government, the consumers will spend their own money to obtain adequate amount of health, and thus substitute health with other commodities, driving the demand for commodities down.
g). This will lead to increased oil supply in the economy, thereby shifting supply curve to the right and slashing prices down in the market.
h).. A reduction in personal income tax shifts the demand curve to the right, thereby increasing both prive and output levels.
i). An increase in labour productivity shifts the supply curve to the right, thereby supplying more output and bringing down price levels.
Related Questions
Navigate
Integrity-first tutoring: explanations and feedback only — we do not complete graded work. Learn more.