determine the effect on either the aggregate demand curve (is it a rightward or

Question

determine the effect on either the aggregate demand curve (is it a rightward or a leftward shift?), the aggregate short-term supply curve, and the long-term aggregate supply curve (does the upward sloping portions of the SAS curve shift left or right, or does the vertical portion of the LAS curve shift to the right or to the left?). Also determine the effect on the price level, the real output level and employment/unemployment. Provide an explanation and express this graphically using the AS/AD macro model.


During the late 1990s, actual output in the U.S. appears to have exceeded potential output. Under these circumstances, we would eventually expect factors prices to rise, causing the SAS curve to shift up (to the left). Once actual output rises above potential output, production resources (i.e., inputs) will be overutilized, eventually causing an increase in factor prices. As factor prices rise, firms will increase their output prices at each output level, causing the SAS curve to shift up (to the left).

Explanation / Answer

aggregate demand curve: leftward shift. the aggregate short-term supply curve : leftward shift long-term aggregate supply curve : no shift effect on the price level : hike in prices real output level and employment/unemployment : increases

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