Question

Indicate whether each of the following factors will affect aggregate demand (AD) or aggregate supply (AS) and whether the effect would be an increase or a decrease. Then indicate what will happen to the price level and the level of real GDP and what type of equilibrium will result assuming that the economy is initially in long-run equilibrium.

a) A decrease in the nominal wage rate. It will affect Aggregate Supply and will result in an increase in total supply.
b) A decrease in exports.
c) A decrease in the exchange rate.
d) The discovery of a vast new oil field in Northern B.C.
e) An increase in government spending.

Answer 1

a. Increase AS. AS curve will shift to the right.

This will lower the price level and increase real GDP in the short run. The economy will produe beyond the potential output creating a expansionary gap.

b.Decrease AD. AD curve will shift to the left.

This will lower the price level and real GDP in the short run. The economy will produce under the potential output creating a contractionary gap.

c.

Increase AD. AD curve will shift to the right.

This will increase the price level and real GDP in the short run. The economy will produce beyond the potential output creating a expansionary gap.

d.

Increase AD. AD curve will shift to the right.

This will increase the price level and real GDP in the short run. The economy will produce beyond the potential output creating a expansionary gap.

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