What effects would each of the following have on aggregate demand or aggregate s
ID: 1255364 • Letter: W
Question
What effects would each of the following have on aggregate demand or aggregate supply? In each case, discuss the expected effects on the equilibrium price level and level of real output. Assume that all other things remain constant.a. A widespread fear on depression on the part of consumers.
b. A large purchase of U.S. wheat by Russia.
c. A $1 increase on the excise tax on cigarettes.
d. A reduction at interest rates at each price level.
e. A major cut in federal spending for health care.
f. The complete disintegration of OPEC, causing a drastic reduction in oil prices.
g. An increase in labor productivity.
h. A 12 percent increase in nominal wages (with no productivity change).
Explanation / Answer
a. A widespread fear on depression on the part of consumers.
A wide spread fear of depression on the part of consumers leads to cut back in the consumption spending and investment spending, and hence a leftward shift in the aggregate demand curve. This shift decreases price level and output level.
Purchase of wheat increases the net exports of US, this increases the AD and shifts it towards its right.
This rightward shift in AD will increase price level and output level.
c. A $1 increase on the excise tax on cigarettes.
A $1 increase in the excise tax on a pack of cigarettes will increase per-unit production cost which will shift aggregate supply curve leftwards. This shift will increase price level and decrease output level.
d. A reduction at interest rates at each price level.
An reduction in interest rates at each price level will increase investment spending, and hence will increase aggregate demand at each price level. It will lead to a rightward shift in aggregate demand curve. This shift will increase price level and output level.
A major cut in Federal spending for health care will decrease government spending, and hence will decrease aggregate demand at each price level. It will lead to a leftward shift in aggregate demand curve. This shift will increase price level and output level.
f. The complete disintegration of OPEC, causing a drastic reduction in oil prices.
The complete disintegration of OPEC, causing oil prices to fall by one-half will decrease per-unit production cost which will shift aggregate supply curve rightwards. This shift will decrease price level and increase output level.
g. An increase in labor productivity.
An increase in labor productivity (with no change in nominal wages) will decrease per-unit production cost which will shift aggregate supply curve rightwards. This shift will decrease price level and increase output level.
h. A 12 percent increase in nominal wages (with no productivity change).
A 12 percent increase in nominal wages (with no change in productivity) will increase per-unit production cost which will shift aggregate supply curve leftwards. This shift will increase price level and decrease output level.
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