Question

In: Economics

Discuss which curves shift (Aggregate demand or aggregate supply in the short run) and determine the...

Discuss which curves shift (Aggregate demand or aggregate supply in the short run) and determine the impact on the equilibrium price and real GDP by the following changes? (Draw initial aggregate demand and supply curves and then draw the new AD or AS curve to find the impact.

1. Increase in price of inputs caused by COVID 19

2. Decrease in interest rate caused by government policy

3. Business taxes fall

4. Increase in personal income tax

5. Government building more roads and highways.

6. Advancement in technology

7. Increase in unemployment insurance amount

8. Increase in wealth tax

Expert Solution

Ans) 1) Increase in the price of raw materials will lead to decrease in aggregate supply because production cost will increase. AS curve will shift to the left and price level will increase while output will decrease.

2) Decrease in interest rates will increase aggregate demand and AD curve will shift to the right. As a result, both price level and output will increase.

3) Decrease in business tax will encourage businesses to invest more. Aggregate demand will increase and AD curve will shift to the right. Both price level and output will increase.

4) An increase in personal income tax will reduce disposable income and hence aggregate demand will decrease. AD curve will shift to the left and both price level and output will decrease.

5) An increase in government expenditure increases aggregate demand. AD curve will shift to the right and both price level and output will increase.

6) An advancement in technology will increase aggregate supply and AS curve will shift to the right. Price level will decrease and output will increase.

7) Unemployment insurance is government spending. An increase in government expenditure will increase aggregate demand. AD curve shifts to the right and both price level and output will increase.

8) Increase in wealth tax will reduce aggregate demand and AD curve shifts to the left and both price level and output will decrease.

Rahul Sunny answered 1 year ago

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