Other things equal, what effects would each of the following have on aggregate d

Question

Other things equal, what effects would each of the following have on aggregate demand or aggregate supply? In each case use a diagram to show the expected effects of the equilibrium price level and the level of real output.

A- A reduction in the economy's real interest rate

B- A major increase in federal spending for health care (with no increase in taxes)

C- The complete disintegration of OPEC, causing oil prices to fall by one-half

D- A 10% reduction in personal income taxe rates (with no change in government spending)

E- A sizeable increase in labor productivity (with no change in nominal wages)

F- A 12% increase in nominal wages (with no change in productivity)

G- A sizeable depreciation in the international value of the dollar

Explanation / Answer

Ans:

(a) AD curve right, output and price level up.

(b) AD curve right, output and price level up (any real improvements in health care resulting from the spending would eventually increase productivity and shift AS right).

(c) AS curve right, output up and price level down.

(d) AD curve right, output and price level up.

(e) AS curve right, output up and price level down.

(f)   AS curve left, output down and price level up.

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