Question

Use aggregate supply and demand diagrams to explain what would happen to GDP and inflation in the following circumstances. Remember, you start the analysis with AD and AS graphed with an equilibrium PL and Q/GDP. Then an “event” takes place. Determine if it is AD or AS, then shift the curve appropriately. Identify the new Price Level and GDP. Say if equilibrium PL increases/decreases and equilibrium GDP increases or decreases.

Consumers decide to cut back their savings, and buy more household appliances.

Tornadoes destroy many factories in the country, while a severe drought ruins many crops.

Miraculous new technological developments raise productivity in manufacturing.

Because of worries over the deficit, the government sharply curtails its expenditures on social programs.

Answer 1

1.

Decrease in savings, is going to increase the demand and AD increases. It shifts AD to the right and price level as well as real GDP increases both at the new equilibrium.

2.

Destruction of factories and poor crops, are going to decrease the supply and AS curve shifts to the left. It increases the price and real GDP decreases at the new equilibrium.

3.

New technological development is going to increase the supply and AS curve shifts to the right. It will decrease the price and increase the real GDP at the new equilibrium.

4.

The decrease in expenditure by the government on social security programs, will decrease the AD and AD curve shifts to the left. As a result, price level as well as real GDP, both decrease at the new equilibrium.