Question

b. What factors shift AS and AD curves? How do you explain macroeconomic fluctuations using AS-AD models and AS/AD curves?

Answer 1

Since AD= Consumption + planned real investment + government expenditure+ export- import

Hence factors affecting the shift of the aggregate demand are

Change in consumption, change in planned real investment, change in government expenditure, change in export and change in import.

Aggregate supply is defined as the sum of supply of goods and services by all firms.

Factors affecting the AS curve are

Number of firms

State of technology

change in the price of inputs

Taxation policy

Expected price in future.

When due to change in the any factors AD shifts rightward, then price level increases and real GDP also increases, so it means unemployment decreases because employment increases and vice-versa.

When due to change in the any factors AS shifts rightward, then price level decreases and real GDP increases, so it means unemployment decreases because employment increases and vice-versa.

As it can be seen in the diagram that initial equilibrium is determined by intersection of AD and AS curve. But AD curve shifts rightward from AD to AD1 and AS curve shifts leftward from AS to AS1, then equilibrium price increases from P to P1 and real GDP increases to Y does not change. It means Real GDP may increase, decreases or remains same. Since Real GDP is uncertain, so it can be sadi that unemployment is alos uncertain because unemployment change with the change in the production of goods and services and real GDP also changes with the change in the production of goods and services.