Question

 1. Explain how each of the following events affects the AD curve 

a. An increase in consumer confidence leads to higher consumption spending. 

 Aggregate demand shifts to the right 

 Aggregate demand is unchanged

 Aggregate demand shifts to the let 

b. The government reduces income taxes. 

 Aggregate demand shifts to the left 

 Aggregate demand is unchanged 

 Aggregate demand shifts to the right

2. Explain how each of the following events affects the AS curve. 

a. The Fed increases the money supply.

 Aggregate supply is unchanged 

 Aggregate supply shifts to the right 

 Aggregate supply shifts to the left 

b. Oil prices drop sharply.

 Aggregate demand shifts to the right 

 Aggregate supply shifts to the left 

 Aggregate demand shifts to the left 

 Aggregate supply shifts to the right

Answer 1

a). When there is an increase in the consumer confidence the people feel optimistic about the future , so they increase their consumption on goods and services. Since the consumption is a component of the aggregate demand the aggregate demand increases and the aggregate demand curve shifts to the right.

Ans: a). Aggregate demand shifts to the right.

b). The reduction in the income taxes increases the disposable income of the people, so when the income increase the people tend to increase the consumption. The increase in the consumption spending adds to the aggregate demand and the aggregate demand curve shifts to the right.

Ans) Aggregate demand shifts to the right.

2.a). The increase in the money supply has no influence on the aggregate supply, it would rather increase the aggregate demand in the economy.

Ans: Aggregate supply is unchanged.

b). The fall in the oil price is a positive supply shock, this reduces the input costs for the business so the firm can now produce the goods and services more cheaply than before. So this increase the aggregate supply and the aggregate supply curve would shift to the right.

Ans: Aggregate supply shifts to the right.