Question

Using aggregate supply and demand analysis, discuss how the following will affect the aggregate level of output and the price level in the economy. Use a SRAS curve. You need to determine whether the AD or SRAS curve will shift, in which direction it will shift, and how this will affect aggregate output and the price level.

a. Price of standardized inputs such as oil decrease.

b. A fall in the stock market.

Answer 1

a) If the price of the standardized goods like the oil decrease that will shift the SRAS curve to the left and new equilibrium will be at a higher price level and output will decrease in the economy. It will not shift the aggregate demand curve but will only cause a movement along the curve in the market.

b) A fall in the stock market will decrease the wealth of the people in the market and that will shift the AD curve to the left, the new equilibrium will be at a lower price and lower output, it will not shift the SRAS but only cause a movement along the curve.