Answer to Question #176116 in Macroeconomics for Melanie

Question

Using the aggregate demand and aggregate supply (AD-AS) model, explain what will happen to the equilibrium price level and Real Gross Domestic Product (GDP) when each of the following events occurs:

(i) Households expect higher future prices after the implementation of General Sales Tax (GST).

(ii) An increase in labour productivity.

(iii) The price of raw materials has decreased by 40%;

(iv) Personal income tax has been decreased.

Answer 1

(i) When the future prices of households rise, the quantity demanded reduces decreasing the equilibrium price. Rising households' price encourage spending by consumers causing larger economic growth.

(ii) When the supply of labour goes up, the equilibrium price falls causing a larger demand for labour increasing the equilibrium price. An increase in labour productivity increases the economic growth.

(iii) A lower price of raw materials results to large quantity supplied. The equilibrium price falls while the quantity demanded increases. The decrease in price of raw materials reduces inflation causing an increase in economic growth.

(iv) Lower income tax rates raises the spending Power of buyers which can increase the demand leading to larger economic growth and a decrease in equilibrium price.