Question

PROBLEM 2:    AD and AS ANALYSIS      

Below are ten different scenarios that will affect the AD or/and the SAS and LAS. For each event, indicate what type of shifts will be created. There are six choices for shifting; for each event, place the number of the shift on the space provided. Provide only one shift for each event.

1.            AD will shift to the left                   4.           SAS will shift to the right
2.            AD will shift to the right                 5.         SAS will shift to the left

3.            LAS will shift to the left                 6.           LAS will shift to the right

Event 1:              wage rates in general rise_______________

Event 2:              an increase in the money supply________________

Event 3.              future profits are expected to increase_________________

Event 4:              due to immigration, the labour force increases______________

Event 5:              interest rates increase_________________

Event 6:              level of government spending increases__________________

Event 7:              improvements in technology take place__________________

Event 8:              the price of oil rises____________________

Event 9:              net exports decrease____________________

Event 10:            reduction in income taxes________________

Answer 1

Event 1:              wage rates in general rise: SAS will shift to the lefft.

Reason: This will increase the firm's input cost and therefore they will reduce their production which causes reduction in supply.

Event 2:              an increase in the money supply: AD will to the right.

Reason: With more money in hand, people will raise their demand which lead to the rightward shift of AD.

Event 3.              future profits are expected to increase: SAS will shift to the right.

Reason: With rise in expectation, firms will plan to increase their production.

Event 4:              due to immigration, the labour force increases: LAS will shift right.

Reason: WIth more labor force, firms can increase their production in the long run as labor is an input required to increase production.

Event 5:              interest rates increase: AD will shift left.

Reason: An increase in interest rate will lead to the fall in investment and as investment is the component of AD. this will cause a fall in AD curve.

Event 6:              level of government spending increases: AD will shift right.

Reason: Government spending is the component of AD and therefore a rise in government spending will cause AD to rise.

Event 7:              improvements in technology take place: LAS will shift right

Reason: With improvement in technology, more goods can be produced with available inputs and therefore production capacity in the long run will also increase.

Event 8:              the price of oil rises: AD will shift left

Reason: With higher price, the demand will reduce as price and quantity demand has inverse relation.

Event 9:              net exports decrease: AD will shift left

Reason: Net export is a component of AD and a fall in net export will cause AD to fall.

Event 10:            reduction in income taxes: AD will shift right.

Reason: Reduction in income tax will increase disposable income and therefore the consumption will increase. with higher consumption the AD will shift rightward.