Using an aggregate demand and supply diagram, explain how each of the following

Question

Using an aggregate demand and supply diagram, explain how each of the following scenarios affects the equilibrium price level and aggregate output. Try your best at trying to graph the scenarios.

a) Consumers expect a recession, while resource prices rise at the same time.
b) Foreign income falls as domestic technology improves.
c) Foreign price level rises as domestic government cuts taxes.
d) Government spending falls and a higher price level is expected.
e) Higher domestic income is occurring right now.
f) Resource prices fall and technology improves

Explanation / Answer

a) Supply and demand curves both move in and to the left. Quantity traded goes down, price may either go up or down based on the relative movement of the curves.

b) The demand curve mobves in and to the lest, the supply curve moves out to the right. Price goes down and quantity traded can go up or down based on the relative movement of the curves.

c) Demand curve moves out and to the right. Price and quantity traded move up.

d) Governemnt spending cuts will cause the demand curve to move in and the higher expected price level will cause it to move out (buy before prices go up). The effect on prices and quantity traded is ambiguous depending on each relative movement.

e) demnd curve moves out and to the right. prices and quantity traded move up.

f) Supply curve moves out and to the right. prices fall and quantity traded increases.

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