Question

Identify whether each of the below events would cause a shift in AD or AS:

	Aggregate Demand		Aggregate Supply
Shift to the Right
Shift to the left

1. The government announces a 1% increase of VAT (Value-added Tax)
2. There is a sustained drought for 1 year on major plant fields
3. There is a sustained increase in the value of the Saudi Riyal against the Pound on the foreign exchange market
4. The government announces spending on a new rail-way between Jeddah and Riyadh
5. The interest rate paid on credit cards, bank loan and overdrafts falls by an average of 2%
6. There is a significant rise in the number of scholarship students returning from abroad
7. There is an increase in the firms’ expectations of the price level
8. There is a new type of fertilizer developed that would increase the productivity of harvesting dates

Answer 1

1. The government announces a 1% increase of VAT (Value-added Tax)
   Leftward shift in AD. INcrease in VAT will reduce the consumption, the reduction wil cause decrease in AD and hence leftward shift in AD.
2. There is a sustained drought for 1 year on major plant fields.
   Leftward shift in AS. Drought will cause lesser production and hence leftward shift in AS.
3. There is a sustained increase in the value of the Saudi Riyal against the Pound on the foreign exchange market
   Considering UK economy, Depreciation of domestic currency will cause more exports and less imports, hence increasing net export. This will cause rightward shift in AD. If its about Saudi government, it will cause decrease in net export and hence leftward shift in AD.
4. The government announces spending on a new rail-way between Jeddah and Riyadh
   This is new government investment, increasing AD, hence rightward shift of AD.
5. The interest rate paid on credit cards, bank loan and overdrafts falls by an average of 2%
   Interest rates decline will cause decline in AD, hence leftward shift in AD.