Question

11. Using aggregate demand, short-run aggregate sup- ply, and long-run aggregate supply curves, explain the process by which each of the following economic - TEMO alderen

Answer 1

a. A decrease in households’ wealth will reduce consumer spending. Beginning at long-run macroeconomic equilibrium, E1 in the diagram, the aggregate demand curve will shift from AD1 to AD2. In the short run, nominal wages are sticky, and the economy will be in short-run macroeconomics equilibrium at point E2. The aggregate price level will be lower than at E1, and aggregate output will be lower than the potential output. The end result is people will have less money to spend.

b. An increase in disposable income will increase consumer spending; at any given aggregate price level, the aggregate demand curve will shift to the right, in the long run at EQ1.  The economy will spend more and the aggregate output will be higher than potential output. In the short-run, nominal wages are sticky, and the economy will be in the short-run at EQ2.