Question

The following events have occurred in the history of the United States:

• A deep recession hits the world economy.
• The world oil price rises sharply.
• U.S. businesses expect future profits to fall

1-)Explain for each event whether it changes short-run aggregate supply, long-run aggregate supply, aggregate demand, or some combination of them.

Answer 1

1) Deep recession hits the world economy: It will reduce aggregate demand in the economy because there would be fall in willingness to pay for goods. It will shift aggregate demand curve to its left.

2) The world oil price rises sharply: Oil market is the most fluctuating market which is a short run fluctuation in the market and effect only short run aggregate supply and induce it to shift backward.

3) U.S. businesses expect future profits to fall: It will induce producers to produce less in long run which will shift long run supply curve to its left.