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. Consider                     first the short-run, then the long-run equilibrium for each scenario.
                    
                    

                        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 future price level is expected.
                        e) Higher future income and lower price level are expected.
                        f) Resource prices fall and technology improves.                     

Explanation / Answer

a) Low consumer confidence lowers consumer spending, which lowers aggregate demand (Shift to the left). Additionally, higher costs of production mean that cost inflation increases, which may cause short term decreases in aggregate supply. Long term, producers may find more efficient means of production, or alternative resources, which may increase aggregate supply again (Shift right)

b) Lowering foreign income means that there is less money, which reduces consumer expenditure and business investment, lowering aggregate demand (shift left). Increase in domestic technology increases aggregate supply as technical efficiency has increased, thus increasing aggregate supply (shift right)

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