Question

In: Economics

Draw the two possible ways to show Economic Growth on the Aggregate Supply and Demand Curve...

Draw the two possible ways to show Economic Growth on the Aggregate Supply and Demand Curve (each method should be shown on a separate graph). What are the “side effects” that accompany Economic Growth on each graph; under what circumstances is each bad? Each portion of an explanation should be a minimum of 5-6 sentences each.

Solutions

Expert Solution

Two Possible ways the economy could grow are increased aggregate demand in the economy and a positive supply shock faced by the economy.

Increased aggregate demand: An increase in the aggregate demand in the economy will lead to an increased economic growth. In the below graph the economy was at the equilibrium at point R which is below the potential level of the economy. At this point, an increased aggregate demand from SRAD to SRAD' will increase the output in the economy and take the output to Q. This increase in the output can be because of increased government expenditure or favorable business sentiments etc.

Positive supply shock: An economy can face a positive economic shock because of new technology introduced, a decrease in the input price like crude oil, immigration to the country and increased labor force etc. In the below graph the economy was at the equilibrium at point E, at this point, the output was Q and Price was P. After a positive economic shock the supply curve shifted to the right from SRAS to SRAS' forming a new equilibrium at point R. At his new equilibrium, the price is lower and the economy is producing more than before at point Q'.


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