Question

Mailings Review View AvvA AaBbCcDdE Emphasis AaBb CcD ABCDdE Heading Normal Due: SSE 104 HW4 Name of student: Staple any extra answer sheets with this question sheet. Topic: Aggregate Demand Describe the effects of each of the following events on the US economy (i.e. What may happen to the price? To the real output?). Explain briefly what cause these effects (i.e. What happens to determinants of AD or AS or both? Why?) Illustrate your answers in given AD-AS diagrams. Label your diagrams and changes carefully. a.) Consumers are confident about the future employment prospect. b.) Firms are very pessimistic about the economic outlook. c.) The Federal Reserves conducts an expansionary policy to lower interest rates FOC

Answer 1

a) Increased consumer confidence in the economy and its future is likely to raise consumption. This would increase aggregate demand and shift AD to the right. As a result, there is an increase in general price level and there is an increase in real GDP in the short run. There is no change but only an upward movement along the AS curve due to price increase.

AS Price level G* G1 Real output

b) Businesses are pessimist about the economy and its future so they are likely to reduces investment. This would decrease aggregate demand and shift AD to the left. As a result, there is a decrease in general price level and there is a decrease in real GDP in the short run. There is no change but only a downward movement along the AS curve due to price decrease.

Price level AD AD Real output

c) In this case there is an increase in the money supply which reduces the rate of interest. This raises private investment. This would increase aggregate demand and shift AD to the right. As a result, there is an increase in general price level and there is an increase in real GDP in the short run. There is no change but only an upward movement along the AS curve due to price increase.

AS Price level G* G1 Real output

e) A dollar depreciation makes domestically manufactured goods and services cheaper for foreigners so exports are increased and imports are reduced. Net exports are increased. This would increase aggregate demand and shift AD to the right. As a result, there is an increase in general price level and there is an increase in real GDP in the short run. There is no change but only an upward movement along the AS curve due to price increase.