Question

Watch the video available at the following link, and write a brief description of the event described in the video.

https://www.youtube.com/watch?v=U9bVGzIhRxM

Assume that prior to the event South Korea’s macroeconomic equilibrium was equal to potential GDP. Using the AD-AS model, explain carefully the immediate and long term effects of the event for the South Korean economy. Draw by hand the appropriate AD-AS diagram to support your explanation.

Answer 1

The video talks of a fall in the consumer sentiment levels in the economy. This will mean that people will want to spend less and so aggregate demand will fall. Thus consumer confidence will decline. Now if the consumer confidence levels fall then this will mean that aggregate demand declines as consumption and investment expenditure falls. The AD curve will thus fall in the medium term causing falling prices and quantity. The economy falls below the potential level. Over the longer term the prices will adjust them selves to a lower level but aggregate demand recovers slowly. The diagram for the same is as follows. The economy starts at A and then moves to B in the short term and then finally settles at C.