Question

Question 1:

Use the model of aggregate demand and short-run aggregate supply to explain how each of the following would affect real GDP and the price level in the short run.

1. An increase in government purchases
2. A major decrease in the stock of capital
3. A trade surplus
4. An increase in Labor

This is the whole question and I need these answers with the graph, please... Thank you!

Answer 1

In short run the AS curve is flat.

1. If there is an increase in Govt purchases. The AD curve will shift up. Which leads to increase in Real GDP as prices are constant.

2. IA major decrease in the stock of capital

A major Decrease in stock of capital means, people do not have enough money in their hand to buy. Hence AD will shift leftwards. Leading to a decrease in Real GDP. The output decreases from Y0 to Y1.

3. A trade surplus means, there is a lot to buy . Hence Demand will shitt upwards, leading to an increase in output from Y0 to Y1.

4. If there is an increase in Labour, it means that people have more income in their hands to buy,Hence the demand curve wll shift upward leading to an increase in real GDP.

It is concluded that in the short run, output is determined by the AD alone and prices are unaffected by the level of output.