Answer to Question #114980 in Macroeconomics for Emirhan

Question

Now assume that there is an increase in government expenditure (G), an
increase in the labour force and a reduction in oil prices. By using the AS-AD graph,
explain the effects of these changes on equilibrium output and equilibrium price level
in the Short-Run. Explain each step in your graph.

Answer 1

Government spending and increased labour force components of aggregate demand , an increase in government spending and labour force will shift the demand curve to the right.A reduction in taxes will leave more disposable income and cause consumptions and savings to increase ,also shifting the aggregate demand curve to the right . Reduction in oil price reduces prices of commodities which makes goods more affordable . Consumers are therefore able to afford more goods which increases aggregate supply both in the short run .