Aggregate Demand and Aggregate Supply

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Economics II Written Assignment Aggregate Demand and Aggregate Supply 11. For each of following events, explain the short-run and the long-run effects on the output and the price level, assuming policymakers take no action. (a) The stock market declines sharply, reducing consumers’ wealth. AS1 AS2 AD1 AD2 Y2 Y1 P1 P2 P3 LRAS A B C P AD-AS diagram Output 0 Since the stock market declines sharply, the people’ wealth are being affected. In short run, it leads to a fall in aggregate demand which would shift aggregate-demand curve from AD1 to AD2. The economy is reached from point A to point B because the output level and the price level would fall from Y1 to Y2 and falls from P1 to P2 respectively. Over…show more content…
The economy would then move from point A to point B as the price level decrease from P1 to P2 and the output increase from Y1 to Y2. (d) A recession overseas causes foreigners to buy fewer U.S. goods. AS1 AS2 AD2 Y2 Y1 P2 P1 LRAS B A P AD-AS diagram Output 0 LRAS2 AD1 C P3 When there is a recession overseas, it causes the foreigners to buy less U.S. goods and so decrease the net exports. As a result, the aggregate demand curve would shift to the left. With the declining output and price level, the economy would be reached from point A to point B. Over time, the short-run aggregate-supply curve would shift rightward and thus the economy would move to point C. And, the price level would fall and the output would return back to the natural rate of output Y1. 13. Suppose firms become very optimistic about future business conditions and invest heavily in new capital equipment. (a) Draw an aggregate-demand / aggregate-supply diagram to show the short-run effect of this optimism on the economy. Label the new levels of prices and real output. Explain in words why the aggregate quantity of output supplies changes. AS1 AD2 AD1 Y1 Y2 P1 P2 A B P Output 0 If the firms are optimistic about the future business conditions and invest heavily in new capital equipment, it tends to raise the investment and so is the aggregate demand which
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