1. Make a list of things that would shift the aggregate demand curve to the righ
ID: 1118717 • Letter: 1
Question
1. Make a list of things that would shift the aggregate demand curve to the right.
2. Make a list of things that would shift the long-run aggregate supply curve to the right.
3. Suppose that a decrease in the demand for goods and services pushes the economy into recession. What happens to the price level? If the government does nothing, what ensures that the economy still eventually gets back to the natural rate of output?
4. What would happen to the price level and output during a period of stagflation? If the government does nothing, what ensures that the economy still eventually gets back to the natural rate of output? If the government wants to end the period of stagflation faster, what policies can be applied?
5. Please use graphs and words to explain how does a monetary policy affect the economy? Will a monetary policy always be functional? What’s the advantages and disadvantages of a monetary policy?
6. Please use graphs and words to explain how does a fiscal policy affect the economy? Will a fiscal policy always be functional? What’s the advantages and disadvantages of a fiscal policy?
7. Please answer the questions below using aggregate demand and aggregate supply curves and explain the graphs you draw with words.
(1) Suppose a boom in stock market prices helps make people feel wealthier. Please draw a graph of aggregate demand and aggregate supply, identify the curves that are affected immediately after the stock boom, and which way these curves would shift.
(2) Compare to the original equilibrium price level and output (real GDP), how will the new equilibrium price and output change in short term change?
(3) Over time, will the equilibrium price in (2) affect the market expectation? Will the aggregate demand and (or) aggregate supply be affected again? Which way these curves would shift again.
(4) How will the equilibrium price and output change in long term?
(5) suppose that policymakers decide to increase consumption tax after the stock boom, which curve will be affected in short term? And how will this curve shift?
(6) compare the short term equilibrium price and output after the new tax policy to that in question (2), what are the differences? Why?
8. Please answer the questions below using aggregate demand and aggregate supply curves and explain the graphs you draw with words.
(1) Suppose OPEC (Organization of the Petroleum Exporting Countries) reaches deal to limit oil production and the oil supply in the U.S. will reduce. Please draw a graph of aggregate demand and aggregate supply, identify the curves that are affected immediately after the oil production limitation, and which way these curves would shift?
(2) Compare to the original equilibrium price level and output (real GDP) before production limitation, how will the new equilibrium price and output change in short term change?
(3) Over time, will the equilibrium price in (2) affect the market expectation? Will the aggregate demand and (or) aggregate supply be affected again? Which way these curves would shift again.
(4) How will the equilibrium price and output change in long term?
(5) Suppose that policymakers decide to increase governmental spending, which curve will be affected in short term? And how will this curve shift?
Explanation / Answer
1. Factors affecting AD are: consumption, investment, government spending and net exports. All these factors positively affect the AD curve. Increased autonomous consumption, increased disposable income due to reduced taxes, increased optimisim about the future economic growth, improved capital goods which increases investment, competitiveness of exports, increase in money supply in the economy, all these shift the AD curve to the right.
2. Long run AS would shift to the right when there are more resources available for production. Increased productivity of workers due to new skills or education, discovery of new minerals, advanced technology of production of goods and services, immigration, all shift the LRAS to the right.
3. As the demand falls, the AD curve shifts tot he left and the price level falls. If the government does nothing, the economy would self correct. This is by changing the expectations about the prices in the economy by the firms and consumers. Prices are sticky due to menu cost, but when prices are below expectation for a long time, the workers and firms would re-negotiate wage contracts to lower nominal wages. This decreases the cost of production as the resource price fall, shifting the short run AS curve to the right. This increases output and eventually, the long run equilibrium is met.
4. Stagflation is a situation where the output falls but the prices are rising. The As shifts to the left and the AD shifts to the right.
Over a period of time, new discoveries of alternate resources or efficient technological innovations shifts the AS curve to the right and the eventually, the equilibrium is re-attained.
Government can use a combination of contractionary monetary policy to increase the interest rates and expansionary fiscal policy like increasing spending to curb the situation of stagflation faster.
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