Question

(Explain what happens to the position of the nation's aggregate demand or aggregate supply curve, the short-run level of equilibrium output, and the nation’s price level if:

(a)  Consumer confidence increases.

(b)  Stock prices decline 40 percent.

(c)  Oil prices drop to $12 per barrel.

(d)  The central bank sharply increases interest rates.

(e)  Government increases the minimum wage).

(Hint: Example: AS shifts to the right, RGDP declines, P increases)

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Answer 1

A) greater consumer confidence will increase consumption. This increases aggregate demand and aggregate demand curve shifts to the right. There is no change in the position of aggregate supply curve. In the short run equilibrium output and the price level both increase

B) declining stock prices is an indication of reducing wealth. This implies that consumption is going to decrease. Aggregate demand decreases and aggregate demand curve shifts to the left. in the short run equilibrium output and the price level both decrease

C) reduction in oil prices will decrease cost of production and increase Total production. This increases the aggregate supply and shift the aggregate supply curve to the right. Output increases and price decreases in the short run

D) higher interest rate will decrease investment spending. Aggregate demand decreases and aggregate demand curve shifts to the left. in the short run equilibrium output and the price level both decrease

E) aggregate supply curve will shift to the left. Output decreases and price increases in the short run.