Label the following as changes leading to either an increase or a decrease aggre
ID: 1104263 • Letter: L
Question
Label the following as changes leading to either an increase or a decrease aggregate demand or aggregate supply. Would there be a movement (upward or downward), a shift (which way, up or down), and/or there is no change?
-U.S. corporate taxes decline.
-U.S. productivity declines.
-Outsourcing reduces costs for American businesses
-cut in personal income tax rates
-a rise in interest rates
-Consumers expect higher inflation in the future
-The exchange rate rises.
Explanation / Answer
1. If US corporate taxes decline then this will mean that the IS curve shifts rightwads as disposable income increases and firms invest more. This will cause investment to increases and so the IS curve shifts rightwards. This raises interest rates and output. The aggregate demand curve also shifts rightwards as a result causing a rise in prices and output.
2. A decline in US productivity will mean that firms produce less. This will cause the level of aggregate supply to fall. The aggregate supply curve shifts leftwards causing a fall in output and an increase in prices. Aggregate demand is left unchanged.
3. This will cause the level of aggregate supply to rise as costs fall. As costs of production decline the aggregate supply curve will shift rightwards and prices fall and output increases.
4. A cut in personal income taxes will cause disposable income to increase. As consumption rises the IS curve shifts rightwards and interest rates and output increase. The AD curve will shift rightwards also and prices and output increase.
5. A rise interest rates will cause a movement up along the IS curve and so output falls. This causes a corresponding movement along the AD curve upwards and so prices rise and output falls.
6. As consumers expect high inflation in the future the prices rise today due to expectations. This will cause an upward movement along the AD curve and so the output level will fall as prices increase.
7. As exchange rate rises, the domestic goods become more expensive and people demand less of it. The demand for imports increase. This will mean that the X-M component in aggregate demand falls. Thus causes the AD curve to shift leftwards and causes prices to fall and output to fall.
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