Question

Aggregate Demand (AD) & Aggregate Supply Start each # scenario at equilibrium and full employment (Q), determine what curve shifts and the impact.T Economic ChangeH WhichDoes the curve shifts?Increase or unemployment, inflation, Does this shift cause a problem of curve AD or AS Decrease? neither or both? 14 Real Interest Rates Decrease 2 Substantial immigration occurs 3A Citizens Pay off Debt*i 4 Better Trained workforce increases ncreasing labor supply productivityH 5Excess Capacity increasest 64Increase by the government in Business 7H payroll taxesi US dollar appreciates relative to foreignersi 8 Increase in Asset valuel 9H Imported Oil input prices fall 10:11 Firms are optimistic about future 11 Business receives a tax subsidy from the 12 Expectations of higher citizen incomesii 13 Government decreases regulation 14An increase in the number of highway returns government standards

Answer 1

Scenario 1

Real interest rate decreases -

Decrease in real interest rate will induce households and businesses to borrow more for consumption and investment spending.

This will shift AD curve.

The AD curve will shift to the right. This implies there is increase in AD.

Given the AS, increase in AD will lead to rise in price level.

So, this shift cause a problem of inflation.

Scenario 2

Substantial immigration occurs increasing labor supply -

This increase in labor supply due to substantial immigration will lead to fall in wage rate.

Fall in wage rate will reduce cost of production of firms and would increase their profit margin prompting them to produce more and thereby leads to increase in aggregate supply.

There will be shift in AS curve.

The AS curve will shift to the right. This implies there is increase in AS.

Given the AD, an increase in AS will lead to fall in price level and increase in real GDP which will reduce unemployment.

So, this shift cause neither the problem of unemployment nor the problem of inflation.

Scenario 3

Citizens pay-off debt -

As citizens will pay-off their debt, they will reduce their consumption.

This will lead to decrease in aggregate demand.

So, there will be shift in AD curve.

The AD curve will shift to the left. This implies that there is decrease in AD.

Given the AS, decrease in AD will lead to rise in price level and decraese in real GDP which will increase unemployment.

So, this shift will cause both problem of unemployment and problem of inflation.

Scenario 4

Better trained workforce increases productivity -

Increase in productivity will increase the production potential of economy and will lead to increase in aggregate supply.

There will be shift in AS curve.

The AS curve will shift to the right. This implies there is increase in AS.

Given the AD, an increase in AS will lead to fall in price level and increase in real GDP which will reduce unemployment.

So, this shift cause neither the problem of unemployment nor the problem of inflation.