11. Explain whether each of the following events and policies will affect the aggregate demand curve...

11. Explain whether each of the following events and policies will affect the aggregate demand curve or the short?run aggregate supply curve, and state what will happen to the price level and real GDP. a) Oil prices rise b) The Fed sells bonds c) Government purchases increase d) Federal taxes increase e) The government slashes transfer payment spending f) Oil prices fall. To the Tutor: Please be clear and explanatory. Will be appreciated. Thank you.

Expert Solution

(a) An increase in price of oil (an input) will increase the cost of inputs, increasing production cost. Firms will lower output, therefore short run aggregate supply (SRAS) curve will shift toward left. This will increase price level and decrease real GDP (an economic condition known as Stagflation).

(b) Fed's sale of bonds decreases money supply, which increases interest rate. Higher interest rate lowers investment and consumption demands, which decrease aggregate demand. The AD curve will shift leftward, so price level and real GDP both will decrease.

(c) Increase in government purchases will increase aggregate demand. The AD curve will shift rightward, so price level and real GDP both will increase.

(d) Higher federal tax will decrease disposable income and consumption for individuals (if business taxes are increases, net profits will fall and firms will invest less, decreasing investment), which lowers aggregate demand. The AD curve will shift leftward, so price level and real GDP both will decrease.

(e) Lower transfer payments will decrease disposable income, lowering disposable income. This will decrease consumption demand. The AD curve will shift leftward, so price level and real GDP both will decrease.

(f) A decrease in price of oil (an input) will decrease the cost of inputs, decreasing production cost. Firms will increase output, therefore short run aggregate supply (SRAS) curve will shift toward right. This will decrease price level and increase real GDP.

Rahul Sunny answered 2 years ago

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