For the following scenarios, determine which curve shifts (AD and/or SRAS and/or LRAS) and in which...

For the following scenarios, determine which curve shifts (AD and/or SRAS and/or LRAS) and in which direction.

(a) A hurricane causes destruction of physical capital along the east coast.

(b) Nominal wages fall

(c) Government spends $2.2 trillion dollars.

Expert Solution

(a) A hurricane causes destruction of physical capital along the east coast - SRAS curve shifts left.

When there is a hurricane, physical capital is destroyed, so this will lead to less production of goods temporarily till the physical capital is renewed or repaired and hence the Short Run Aggregate Supply (SRAS) Curve will shift left.

(b) Nominal wages fall - AD curve shifts left.

When demand for labor decreases but the supply of labor remains the same, the nominal wage will fall.This means that the Aggregate Demand (AD) for labor decreases, there is less money in people's hands than before and so the AD curve shifts to the left.

(c) Government spends $2.2 trillion dollars - AD curve shifts right.

When government spends $2.2 trillion dollars, the aggregate demand for goods and services increases because the government spent that money in various sectors and also the money exchanged hands and lead to the aggregate demand to increase.

Rahul Sunny answered 8 months ago

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