Question

Draw Demand/Supply diagrams and briefly discuss how shifts in aggregate supply and demand are likely to lead to changes in output and inflation when:
e) the government institutes an effective job training program for high school dropouts

f) floods in the Midwest causes farm output to fall

Answer 1

(e) As a result of the government instituting an effective job training for high school dropouts, this will result in increased demand for people who now have greater purchasing power due to greater incomes and will hence the AD curve will shift rightwards to AD', resulting in an increase in price level (inflation) in the economy and an increase in equilibrium output.

(f) Floods in Midwest causing the farm output to fall will lead to a leftward shift in the aggregate supply curve (due to decreased output) and will thus exert inflationary pressure in the economy (increase in price level).