Question

Draw 4 aggregate model graphs.

1 Rates on borrowing money fall to historic lows, making loans very cheap.

2 Other countries go wild buying U.S. products and exports increase dramatically.

3 Saudi Arabia has a civil war and oil production to the U.S. is cut in half.

4 Birth rates increase dramatically in the U.S. over the next 10 years. What will be the result 20 years from now if all other factors in the economy remain stable for that time?

Answer 1

Answer 1 :-

If the government reduces the interest rates the cost of borrowing also reduces which leads to more loans in the market . the increase in the amount of loans increases the money supply which leads to higher disposable income for consumers . this increase in disposable income of consumers lead to shift of of aggregate demand curve from AD1 to AD2 to rightwards due to increase in consumption level .Thus more loans in the market leads to to increase in the aggregate demand.

Answer 2 :-

The aggregate demand is composed of four components that are consumption, investment, government spending and net exports. Net exports is the difference between exports and imports .If the demand for US goods increases at a very high rate ,this will drastically increase the the Exports thereby shifting the aggregate demand curve to the rightward from AD1 to AD2.

Answer 3 :-

As mentioned above the the net exports is the difference between exports and imports. Now when due to Saudi Arabia Civil War the imports by US from Saudi Arabia have reduced to half, this will make domestic goods relatively more attractive and the aggregate demand will shift to rightward from AD1 to AD2 .

Answer 4 :-

If the US population increases drastically over next 10 years then this will increase the working population that will lead to to increase in long run aggregate supply curve from LRAS1 to LSAS2 .At the initial level of point A the consumption level was AD1 and due to rise in consumption level because of increased population the consumption level shifts to AD2 to the rightwards. However it must be noted that the price level will remain same at P1 but the real GDP will grow to Y2.