Question

Applying the AD/AS Model (please use graph a long with your answer)

Consider the following two events

(i) Growth Surges in East Asia

(ii) A sharp increase in oil price

The actions the government or central bank might want to take to influence the economy. Justify your answer.

Answer 1

1. Growth surges in east asia

It indicates large scale output in terms of GDP or GVA. It helps the investors to understand the economic conditions of the economy. In the short run, East Asian growth surges more investment in the economy. Production and income of the people will increase. Economic growth is caused by AD,  aggregate demand curve shifts to the right. Price go up and aggregate/ real output increases from Y to y1. Firms inspired by higher price increase production which shifts AS curve to the right that further leads to great output in the Asian economy. In the long-run economic growth occurs due to increase productivity will be shown by a gradual shift in the AS curve to the right.

2. A sharp increase in the price of oil reduce aggreagate supply due to in higher cost of production. Which shifts the AS curve to the left. Consequently output falls from Y to Y1. and price go up from the initial P to P1.

In the initial case there is no government or central banks initiatives necessary for the growth golf the economy. Because they are in the pace of economic growth. In the second case the government needs to support producers and expansionary policies should be introduced to curtail the problem of unemployment inflation etc.