Question

1) Draw a generic Aggregate Supply (AS) and Aggregate Demand (AD) curve on a set of axes. Label your vertical axis and your horizontal axis appropriately and indicate where the macroeconomic equilibrium is.

(2) Then find a current events article that discusses some macroeconomic event that will affect either AS or AD. Represent this effect using a rightward or leftward shift as appropriate.

(3) Interpret the effect on the price level, output, and unemployment in the context of your model as applied to your current events article.

Answer 1

The above diagram represents the macro economic equilibrium, where the aggregate demand and the supply curve were intersect. The price level is on the vertical axis and the real GDP on the horizontal axis. The equilibrium is shown by the letter 'E'.

Suppose the government is increased the tax rates in the economy, and this would negatively affect the consumption and the investment demand so the aggregate demand falls, the aggregate demand curve will shift to the left. As a result the price level and the real GDP will decrease and the unemployment will increase.

Since there is decrease in the economic activity the unemployment will rise. The diagram is given below