Question

With each of the following events, explain which curve shifts and why. Provide one real world example of that particular curve shift.

• There is a recession in your main global trading partner’s economy.
• The central bank lowers interest rates.
• Minimum wage increases to $20/hour.
• There is a new way to produce solar power that can be used in the same way as fossil fuels.

If possible, share your work with a peer and compare notes.

Answer 1

a) If there is a recession in the trading partners economy that will shift the AD curve to the left because the exports will fall and exports are the part of the aggregate demand , the new equilibrium is at a lower price and lower output

b) It will increase the investment and demand in the market shifting the aggregate demand curve to the right. The new equilibrium will be at a higher price and higher cost.

c) An increase in the minimum wage will make the production costlier and that will shift the aggregate supply curve to the left and the new equilibrium will be at a higher price and lower output.

d) it will make the production more efficient and that will shift the SRAS to the right.