Subpart (a):
Effect on Aggregate Demand and Supply.
Subpart (a):
Explanation of Solution
When consumers fear of an impending economic depression, their spending decline and they tend to save more. This leads to a decrease in AD curve. This can be explained by using figure 1.
In figure 1, horizontal axis represents the real GDP(
Concept Introduction:
Aggregate demand (AD): Aggregate demand refers to the total value of the goods and services that are demanded at a particular price in a given period of time.
Subpart (b):
Effect on Aggregate Demand and Supply.
Subpart (b):
Explanation of Solution
When a new tax is imposed on producers, cost of production comes up and there is no incentive to produce more. This leads to a decline in
In figure 2, horizontal axis represents the real GDP and vertical axis represents price level. In this case, the AS curve shifts left (from AS to AS1), this moves the equilibrium position from E to T, thus there is a decline in the output (from Q to Q1) and a rise in the price level (from P to P1).
Concept Introduction:
Aggregate demand (AD): Aggregate demand refers to the total value of the goods and services that are demanded at a particular price in a given period of time.
Aggregate supply (AS): Aggregate supply refers to the total value of the goods and services that are available for purchase at a particular price in a given period of time.
Subpart (c):
Effect on Aggregate Demand and Supply.
Subpart (c):
Explanation of Solution
Figure 3 can explain the shift in AD curve due to reduction in interest rates at each price level. In figure 3, horizontal axis measures the real GDP and vertical axis measures the price level.
A reduction in interest rates decreases the borrowing cost increases the spending.
This leads to a rightward shift of AD curve from AD1 to AD2. Thus, it brings the output and price level up. The output increases from Q1 to Q2 and price level increases from P1 to P2.
Concept Introduction:
Aggregate demand (AD): Aggregate demand refers to the total value of the goods and services that are demanded at a particular price in a given period of time.
Aggregate supply (AS): Aggregate supply refers to the total value of the goods and services that are available for purchase at a particular price in a given period of time.
Subpart (d):
Effect on Aggregate Demand and Supply.
Subpart (d):
Explanation of Solution
A major increase in spending shifts the AD curve to right. Figure 4 is used to explain this situation. In figure 4, horizontal axis measures the real GDP and vertical axis measures the price level.
Government expenditure is a key determinant of changes in the aggregate demand. The increase in government spending (spending for health care) increases the aggregate demand leading to a shift of AD curve from AD1 to AD2. Any real improvements in healthcare resulting from the spending would ultimately increase the productivity, thereby shifting the AS curve to the right (from AS1 to AS2). The equilibrium moves from a to c leading to an increase in output (from Q1 to Q3) .It will also move the price level up from P1 to P3.
Concept Introduction:
Aggregate demand (AD): Aggregate demand refers to the total value of the goods and services that are demanded at a particular price in a given period of time.
Aggregate supply (AS): Aggregate supply refers to the total value of the goods and services that are available for purchase at a particular price in a given period of time.
Subpart (e):
Effect on Aggregate Demand and Supply.
Subpart (e):
Explanation of Solution
The general expectation of surging inflation in the near future will increase the aggregate demand today because the consumers will want to buy products before their prices escalate. This can be illustrated using figure 3. As a result, there will be a rightward shift of AD curve from AD1 to AD2 which brings the output and price level up. In figure 3, the output increases from Q1 to Q2 and price level increases from P1 to P2.
Concept Introduction:
Aggregate demand (AD): Aggregate demand refers to the total value of the goods and services that are demanded at a particular price in a given period of time.
Aggregate supply (AS): Aggregate supply refers to the total value of the goods and services that are available for purchase at a particular price in a given period of time.
Subpart (f):
Effect on Aggregate Demand and Supply.
Subpart (f):
Explanation of Solution
Figure 5 is used to explain this case. In figure 5, horizontal axis measures the real GDP and vertical axis measures the price level.
As oil prices fall (oil is an imported resource) due to the disintegration of OPEC, it increases the U.S. aggregate supply. As a result, there will be a rightward shift of AS curve from AS to AS1. This brings the output level up from Q to Q1 and price level down from P to P1.
Concept Introduction:
Aggregate demand (AD): Aggregate demand refers to the total value of the goods and services that are demanded at a particular price in a given period of time.
Aggregate supply (AS): Aggregate supply refers to the total value of the goods and services that are available for purchase at a particular price in a given period of time.
Subpart (g):
Effect on Aggregate Demand and Supply.
Subpart (g):
Explanation of Solution
A reduction in the personal income tax rates raises take-home income increases consumer purchases at each possible price level. This is illustrated in figure 3. Tax cuts shift the aggregate demand curve to the right from AD1 to AD2 which brings the output and price level up. In figure 3, the output increases from Q1 to Q2 and price level increases from P1 to P2.
Concept Introduction:
Aggregate demand (AD): Aggregate demand refers to the total value of the goods and services that are demanded at a particular price in a given period of time.
Aggregate supply (AS): Aggregate supply refers to the total value of the goods and services that are available for purchase at a particular price in a given period of time.
Subpart (h):
Effect on Aggregate Demand and Supply.
Subpart (h):
Explanation of Solution
The sizable increase the labor productivity with no change in nominal wages will increase the overall productivity as more output is available for the given input. This increases the aggregate supply thereby shifting the AS curve to the right from AS to AS1 (Refer Figure 5). This leads to an increase in output (from Q to Q1) and a decrease in price level from P to P1.
Concept Introduction:
Aggregate demand (AD): Aggregate demand refers to the total value of the goods and services that are demanded at a particular price in a given period of time.
Aggregate supply (AS): Aggregate supply refers to the total value of the goods and services that are available for purchase at a particular price in a given period of time.
Subpart (i):
Effect on Aggregate Demand and Supply.
Subpart (i):
Explanation of Solution
This case can be explained using Figure 2. When there is an increase in nominal wages with no change in productivity, it increases per unit cost of production. This force the AS curve to shift left (from AS to AS1). The equilibrium position moves from E to T, thus there are a decline in the output (from Q to Q1) and a rise in the price level (from P to P1).
Concept Introduction:
Aggregate demand (AD): Aggregate demand refers to the total value of the goods and services that are demanded at a particular price in a given period of time.
Aggregate supply (AS): Aggregate supply refers to the total value of the goods and services that are available for purchase at a particular price in a given period of time.
Subpart (j):
Effect on Aggregate Demand and Supply.
Subpart (j):
Explanation of Solution
Figure 6 shows the impact of increasing demand and decreasing supply.
Figure 6 is used to explain this condition. The horizontal axis in Figure 6 measures the real domestic output whereas price level is measured by the vertical axis. A rise in net exports (higher exports relative to imports) shifts the aggregate demand curve to the right (from AD1 to AD2). But, due to the higher input prices, per unit cost is more, leading to a shift of the aggregate supply curve to the left from AS1 to AS2. This leads to an increase in output from Q to Q1 along with an increase in price level from P to P1.
Concept Introduction:
Aggregate demand (AD): Aggregate demand refers to the total value of the goods and services that are demanded at a particular price in a given period of time.
Aggregate supply (AS): Aggregate supply refers to the total value of the goods and services that are available for purchase at a particular price in a given period of time.
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Chapter 32 Solutions
ECO 2010 INCLUSIVE ACCESS
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