Answer to Question #16172 in Economics of Enterprise for a n m

Question

Assume an economy operates on the middle part of its aggregate supply curve. State the direction of effect on aggregate demand or aggregate supply for each of the following changes in conditions. What is the effect on the price level, real GDP and employment?

(a) The price of crude oil rises significantly
(b) Spending on welfare and aged pensions doubles
(c) The value of the currency falls on the foreign exchange market. i.e the currency depreciates
(d) The Government halves the goods and services tax (GST) on all consumer goods
(e) The Government announces rises in company tax.

Answer 1

(a) The price of crude oil rises significantly - consumers don't waste as much
fuel.. tax collections fall.. vacation spots suffer.. less people fly.. aviation
industry suffers... unemployment down and real GDP down; the volume of aggregate
demand decreases.
(b) Spending on welfare and aged pensions doubles - the
price level decreases, aggregate demand increases and real GDP increases
(c)
The value of the currency falls on the foreign exchange market. i.e the currency
depreciates - the price level increases, aggregate demand decreases, real GDP
decreasesand unemployment decreases, aggregate supply increases
(d) The
Government halves the goods and services tax (GST) on all consumer goods - the
price level increases, aggregate demand decreases, real GDP decreases and
unemployment increases, aggregate supply increases
(e) The Government
announces rises in company tax - aggregate supply increases, aggregate demand
decreases, the price level increases, GDP decreases, the unemployment decreases