Question

Suppose an economy currently is at long-run equilibrium point E, with full-employment output (Y*) and price level P*. Given the changes in the economy listed to the right, illustrate the region where the new short-run equilibrium would be. Note that in each case, both the aggregate demand curve and the aggregate supply curve shift. Depending on the direction of the shift, you may not know what happens to either the price level or real GDP. Each case matches with one point.

Answer 1

Answer:

Consider the following calculations

Explanation:

A - Increase in oil prices decreases SRAS (SRAS shifts to the left) and increase in consumer confidence will increase AD (AD will shift to the right).

B - Household wealth falls, as a result AD will decrease (AD shifts to the left) and firms expect the price level to fall - decrease in firm's expectations about future price will cause forms to increase aggregate supply now. As a result, SRAS shifts to the right.

C - Federal reserve cuts interest rate, Therefore cost of borrowing decreases, investment increases, aggregate demand increases. AD shifts to the right.

New technology makes workers more productive. Aggregate supply increases. SRAS shifts to the right.

D - Both AD and SRAS shifts to the left.