What would each of the following have on aggregate deman oraggergate supply? In

Question

What would each of the following have on aggregate deman oraggergate supply? In each case us a diagram to show the expectedeffects on the equilibruim price level and the level of realoutput. Assume all other things remain constant. a) A widespread fear of depression on the part ofconsumers. b) A $2 increase in the excise tax on a pack ofcigerattes. c) A reduction in interest rates at each price level. d) A major increase in Federal spending for health care. e) The expectation of rapid inflation f) The complete disintegration of OPEC, causing oil pricesfall by one-half. g) A 10 percent reduction in personal income tax rates. h) A sizable increase in nominal wages (with no change inproductivity). i) A 12 percent increase in nominal wages (with no change inproductivity). j) Depreciation in the international value of thedollar. What would each of the following have on aggregate deman oraggergate supply? In each case us a diagram to show the expectedeffects on the equilibruim price level and the level of realoutput. Assume all other things remain constant. a) A widespread fear of depression on the part ofconsumers. b) A $2 increase in the excise tax on a pack ofcigerattes. c) A reduction in interest rates at each price level. d) A major increase in Federal spending for health care. e) The expectation of rapid inflation f) The complete disintegration of OPEC, causing oil pricesfall by one-half. g) A 10 percent reduction in personal income tax rates. h) A sizable increase in nominal wages (with no change inproductivity). i) A 12 percent increase in nominal wages (with no change inproductivity). j) Depreciation in the international value of thedollar.

Explanation / Answer

(a) AD curve left, output down, and price level down (assuming noratchet effect). (b) AS curve left, output down, and price level up. (c) AD curve right, output and price level up. (d) AD curve right, output and price level up (any realimprovements in health care resulting from the spending wouldeventually increase productivity and shift AS right). (e) AD curve right, output and price level up. (f) AS curve right, output up and price level down. (g) AD curve right, output and price level up. (h) AS curve right, output up and price level down. (i) AS curve left, output down and price level up. (j) AD curve right (increased net exports); AS curve left (higherinput prices)

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