Answer to Question #115028 in Macroeconomics for Sura Alnaimy

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

An increase in government expenditure (G) will increase aggregate demand, an increase in the labour force and a reduction in oil prices will increase aggregate supply. So, the equilibrium output will increase, and equilibrium price level may either increase or decrease in the Short-Run.