Question

1. What causes a shift in the AS and AD curves in the long run and short run?

Answer 1

Aggregate demand can be influenced by any positive or negative shock to its components. This can occur both in the long run and short run. These include lower consumer confidence and business confidence, wealth reduction such as stock market crash, government policies such as increasing or decreasing expenditure, taxes etc., Monetary policy stances such as changing reserve requirements and discount ratio, open market operations. These factors are responsible for bringing a shift in the aggregate demand

aggregate supply can be influenced by the supply side forces such as changing fuel cost, nominal wages, amount of resources available for production, immigration, negative supply shocks such as a hurricane and other natural disasters. This may change the long run potential output of the economy as well.