Question

For the question below, write an explanation of the short-run effect (including the determinant of AD or AS that is causing the shift, the line that shifts (AD or AS), the direction of the shift (left or right), and the impact on output and price level (increase or decrease) and submit a properly drawn and labeled aggregate demand and aggregate supply graph for the scenario. Make sure your name and assignment number are written on each page of graphs you submit. All text must be written in the text box provided.

Congress votes to cut spending on the space program.

Answer 1

Lower government spending will decrease aggregate demand, shifting AD curve leftward, therefore decreasing real GDP and price level. In following graph, AD0 & SRAS0 are initial aggregate demand & short run aggregate supply curves intersecting at point A with initial price level P0 and real GDP Y0. As AD0 shifts left to AD1, it intersects SRAS0 at point B with lower price level P1 and lower real GDP Y1.