Impact of Events on Short Run Aggregate Demand Curve and Short Run Aggregate Supply

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Question

For each of the following scenarios determine whether the event will affect short-run aggregate demand (AD) curve or the short run aggregate supply. In your answer, explain whether the aggregate demand or aggregate supply will shift to the left or right (Hint: the scenario cannot affect the AD and AS curve at the same time)

1. A decrease in consumer wealth occurs due to a plunge in stock prices.

2. Households and businesses have more optimistic expectations regarding future economic performance.

3. There are higher levels of investment spending by
businesses.

4. 1. Labor productivity increases in the macroeconomy.

5. Hurricane Sandy destroys a significant amount of infrastructure in the North East region of the USA.

6. In order to close the budget deficit, the government increases taxes for households and businesses.

Solution Preview

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1. A decrease in consumer wealth occurs due to a plunge in stock prices.

The wealth effect will reduce the aggregate consumption, which identically shifts the short-run aggregate demand curve and left (up)....

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