Question

1. For each of the following, forecast how prices and output will change by drawing and AD-AS graph, and explain your answers using the step by step method to forecast macroeconomic outcomes.

1. The latest data on consumer confidence indicate that consumers have become pessimistic about the future of the economy and are therefore spending less
2. Innovations in solar cell technology cause energy prices to decline across the country.
3. The federal government passes a new bill that dramatically increases government spending on the military
4. The Mexican government eliminates the tariffs it charges on goods exported from Canada
5. Top executives report that they’re quite uncertain about the future, as trade deals with the country’s largest trading partners are being renegotiated and remain in flux
6. 最大的运输公司的自动化已大大降低了全国企业的运输成本。

Answer 1

a. A decrease in future expectations have decreased Consumption levels. Thus a fall in aggregate demand. AD shifts to the left, AS remains unchanged. There is a decrease in price level and output.

b. Energy is the input for most poducers in the economy. A decrease in energy prices will decrease input cost of firms. This will allow producers to supply more at any given price. Thus AS increases and shifts rightwards. This increases output levels and decreases price levels.

c. Government expenditure is a component of AD. An increase in this component increases AD. AD shifts rightwards causing price and output to rise.

d. Elimination of tariff by Mexica, increases exports. This increases the net exports and hence the AD. AD curve shifts right causing output and prices to rise.

e. Future uncertainity reduces Investment demand of the top executives. This causes AD to decrease and shift left. This decreases price and output levels.

f. The automation has decreased transporation costs. Transportation costs are part of input costs of producers. Hence automation decreases this input cost. This causes a increase in AS and AS shifts rightwards. this causes price to fall and output to rise.