Aggregate Demand and Aggregate Supply
Economics II
Written Assignment
Aggregate Demand and Aggregate Supply
11. For each of following events, explain the short-run and the long-run effects on the output and the price level, assuming policymakers take no action.
(a) The stock market declines sharply, reducing consumers’ wealth.
AS1
AS2
AD1
AD2
Y2
Y1
P1
P2
P3
LRAS
A
B
C
P
AD-AS diagram
Output
0
Since the stock market declines sharply, the people’ wealth are being affected. In short run, it leads to a fall in aggregate demand which would shift aggregate-demand curve from AD1 to AD2. The economy is reached from point A to point B because the output level and the price level would fall from Y1 to Y2 and falls from P1 to P2 respectively.
Over time, the price level would be adjusted, so the short run aggregate supply curve would shift rightward from AS1 to AS2. As a result, the output level would return to the natural rate of output Y1 and the price level would fall from P2 to P3. And the economy would be reached at point C which is the interaction of new-aggregate demand curve and long-run aggregate-supply curve.
(b) The federal government increases spending on national defense.
AS2
AS1
AD2
AD1
Y2
Y1
P3
P2
P1
LRAS
C
B
A
P
AD-AS diagram
Output
0
In short run, the federal government increases spending on national defense means that an increase in government purchases. Thus, the aggregate-demand curve would shift rightward from AD1 to AD2. With the both rising output and price level, the economy would be reached from point A to point B.
In long run, as the price level has adjusted, the short run aggregate supply curve shift leftward from AS1 to AS2 to restore the equilibrium at point C. And the price level would rise to P3 and the output would return to the natural rate of output Y1.
(c) A technological improvement raises productivity
AS1
AS2
AD
Y2
Y1
P2
P1
LRAS
B
A
P
AD-AS diagram
Output
0
LRAS2
Since there is an
Written Assignment
Aggregate Demand and Aggregate Supply
11. For each of following events, explain the short-run and the long-run effects on the output and the price level, assuming policymakers take no action.
(a) The stock market declines sharply, reducing consumers’ wealth.
AS1
AS2
AD1
AD2
Y2
Y1
P1
P2
P3
LRAS
A
B
C
P
AD-AS diagram
Output
0
Since the stock market declines sharply, the people’ wealth are being affected. In short run, it leads to a fall in aggregate demand which would shift aggregate-demand curve from AD1 to AD2. The economy is reached from point A to point B because the output level and the price level would fall from Y1 to Y2 and falls from P1 to P2 respectively.
Over time, the price level would be adjusted, so the short run aggregate supply curve would shift rightward from AS1 to AS2. As a result, the output level would return to the natural rate of output Y1 and the price level would fall from P2 to P3. And the economy would be reached at point C which is the interaction of new-aggregate demand curve and long-run aggregate-supply curve.
(b) The federal government increases spending on national defense.
AS2
AS1
AD2
AD1
Y2
Y1
P3
P2
P1
LRAS
C
B
A
P
AD-AS diagram
Output
0
In short run, the federal government increases spending on national defense means that an increase in government purchases. Thus, the aggregate-demand curve would shift rightward from AD1 to AD2. With the both rising output and price level, the economy would be reached from point A to point B.
In long run, as the price level has adjusted, the short run aggregate supply curve shift leftward from AS1 to AS2 to restore the equilibrium at point C. And the price level would rise to P3 and the output would return to the natural rate of output Y1.
(c) A technological improvement raises productivity
AS1
AS2
AD
Y2
Y1
P2
P1
LRAS
B
A
P
AD-AS diagram
Output
0
LRAS2
Since there is an