Question

In: Economics

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.

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

Solutions

Expert Solution

a) This will shift the AD curve to the right and the new equilibrium will be at a higher price and higher level of output in the market.

b) This will shift the LRAS and SRAS to the left and the new equilibrium will be at a higher price and lower level of output.

c) A trade surplus will shift the AD curve to the right and the new equilibrium will be at a higher price and higher level of output in the market.

d) An increase in the labor will shift the SRAS to the right and the new equilibrium will be at a lower price and higher level of output.

Rahul Sunny answered 1 year ago
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