Question

Describe whether the following changes cause the aggregate demand curve to increase (shift right), decrease (shift...

  1. Describe whether the following changes cause the aggregate demand curve to increase (shift right), decrease (shift left), or neither.

    (a) The price level increases. (b) Investment decreases.

    (c) Imports decrease and exports increase. (d) The price level decreases.

    (e) Consumption increases.
    (f) Government purchases decrease.

  2. Describe whether the following changes cause the long-run aggregate supply curve to increase (shift right), decrease (shift left), or neither.

    (a) The price level increases.
    (b) The stock of capital in the economy increases.

    (c) Natural resources increase. (d) The price level decreases.

    (e) Firms and workers expect the price level to rise. (f) The number of workers in the labor force increases.

  3. Describe whether the following changes cause the short-run aggregate supply curve to increase (shift right), decrease (shift left), or neither.

    (a) The price level increases. (b) Input prices decrease.

    (c) Firms and workers expect the price level to fall. (d) The price level decreases.

    (e) New policies cause an increase in the cost of meeting government regulations. (f) The number of workers in the labor force increases.

  4. Suppose that a sudden increase in aggregate demand moves the economy from its long-run equilibrium.

    (a) Illustrate this change using the aggregate demand-aggregate supply model. (b) What are the effects of this change in the short run and the long run?

5. You work for Dr. Zhang, the autocratic dictator of Zhouland. After taking an economics course, you decide that devaluing (i.e., making less valuable) your currency (Zhoullars) is the way to increase GDP. Following your advice, Dr. Zhang orders massive increases in the supply of Zhoullars, which reduces the value of Zhoullars in world markets. Use the AD-AS model to determine the effects on real GDP, unemployment, and the price level in Zhouland in both the short run and the long run. Assume the economy was in long-run equilibrium before this change and consider only this stated change.

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Homework Answers

Answer #1

(1)

(a) An increase in price level causes an upward movement along AD curve, lowering the quantity of real GDP demanded. It does not shift AD curve.

(b) A decrease in investment decreases aggregate demand, shifting AD curve leftward.

(c) Increase in exports and decrease in imports increase net exports (= exports - imports), which increases aggregate demand, shifting AD curve rightward.

(d) A decrease in price level causes a downward movement along AD curve, increasing the quantity of real GDP demanded. It does not shift AD curve.

(e) Increase in consumption increases aggregate demand, shifting AD curve rightward.

(f) Decrease in government purchases decreases aggregate demand, shifting AD curve leftward.

NOTE: As per Answering Policy, 1st question is answered.

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