Determine whether each of the following situations would cause a shift of the ag

Question

Determine whether each of the following situations would cause a shift of the aggregate demand curve, a shift of the aggregate supply curve (Long run and Short run), neither, or both Which curve shifts, and in which direction? What happens to aggregate output and the price level in each case? Is there an expansionary, contractionary, or no gap between the potential output and the actual output? Ishe unemployment rate lower or higher than the natural rate of unemployment. a. Consumer confidence declines. b. The supply of resources increases i.) temporary increase i) permanent increase c. The wage rate increases

Explanation / Answer

Answer a

The Aggregate Demand and Aggregate Supply Curve determine the level of output , employment and income. The aggregate demand is related with the consumers of the society. if there is general rise of income of consumers, the AD curve shifts upward toward the right because the people would like to pay more for the commodity. It has also to do with the prospective demand of future.

Therefore, if the confidence level of consumers go down, the Ad curve will shift below the original curve. It means they would demand less commodity at the existing prices.

This will lead to less output, less employment and less income in the economy if the supply curve does not undergo any change.

The price level of commodity will go down.

Naturally, it will lower down the employment level.

Answer b

If the supply of resources increases then in the short run (temporarily) there will not be any change in employment level. But in the long run (permanent ) there would be reduction in prices of resources that would educe the cost of supply. Hence the supply curve would be shifted below the original AS curve. This would raise the employment level. There would be more output. The confidence level of consumers would be restored.

Full employment level can't be achieved because there would be always some natural level of employment which is the sum of frictional, structural and surplus unemployment.

Answer c

If wage rate increases, the aggregate supply curve will shift upward, thereby lowering the employment level. But the rising wages will also raise the demand curve to the right. This might balance the employment level. but this would depend upon how much the demand curve shifts vis a vis the supply curve.

The drop in employment level would be short term phenomenon; but in the long run as the demand curve picks up the full employment level may be achieved.

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