Question

Draw the Aggregate supply (AS) curve. On this curve you must demonstrate maximum capacity, wage-price spiral, the range of full employment and unemployment, please explain what happen to the inflation rate along the AS curve.

Explain wage-price spiral using two to three sentences.

Suppose the economy experienced a negative shock such as a hurricane, how will this affect the aggregate supply curve, please demonstrate this graphically?

Suppose there is an increase in the population how will this affect the AS curve, please demonstrate this graphically and explain your answer?

Answer 1

Initial AD is ADo and given aggregate supply curve is SAS, price level Po and output level Yo are determined. Suppose the AD increases to AD1, it will be seen that the price level rises to P1 and aggregate national output increases to Y1. This leads to employment of labour and therefore reduction unemployment rate. This the rise in the price level results in lowering unemployment rate showing inverse relationship between the two. If AD increases further the higher will be the rate of inflation which will cause greater increase in aggregate output and employment resulting in lower rate of unemployment.