Question

consider the macroeconomic AD-AS model depicting an aggregate demand curve and a short-run aggregate supply curve. assume that changes in national output also represent changes in real GDP.

a. use the AD-AS model above to explain and illustrates the differences between demand-side measures and supply-side measures and give an example of each. you also need to mention which markets are embedded within each curve.

b. use the AD-AS model above to analyse and illustrate the short run impact of an increase in energy prices on GDP, inflation and employment. what type of inflation is this.

Answer 1

Demand side measures are used to increases or decrease aggregate demand to affect output ,employment and inflation . Aggregate demand consists of consumer spending , investment, government spending and net exports. According demand side approach, economic growth and full employment created by higher aggregate demand for goods and services For example :To increase aggregate demand in the economy, they argue that government should increase its spending that will help to growth of the economy by providing higher employment opportunities Supply side policies are the measures of the government to increase productivity and increase efficiency in the economy. The purpose of supply side policies is to increase the aggregate supply of good and services, there potential output of an economy can produce. Supply side policies includes lowering of tax rates, reduction of social security contributions, reduction of indirect taxes ,increasing subsidies for firms etc b, Increase in price of energy will decrease the aggregate supply of good and services. Because it will increase the cost of production of all firms in the economy. Because there are many products whose productions are either directly or indirectly related with energy. So energy is a raw material used in production process. So increase in energy prices leads to increase the cost of productions. It shift the AS curve to leftward. As a result it will increase the price level in the economy It will reduce the labor demand and thereby it reduce the employment level Therefore it will decrease the aggregate supply of good and services. It will reduce the production and output level in the economy . Therefore it will reduce the GDP of the economy