Answer to Question #176117 in Macroeconomics for Melanie

Question

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

(i) A technological advancement in agricultural sector.

(ii) The Malaysian government’s economic stimulus package of RM8 billion.

(iii) An appreciation of Ringgit Malaysian (RM).

Answer 1

The diagram above is a combination of the aggregate demand curve and the aggregate supply curve.The intersection of the aggregate supply and aggregate demand curves shows the equilibrium level of real GDP and the equilibrium price level in the economy.

(i) Technological advancements improve production efficiency. Thus, there will be an increase in supply. With an increase in supply, there is a fall in price and therefore the equilibrium price will fall. This will cause the GDP to increase due to more purchasing at low prices.

(ii) The stimulus packages will effectively put more money back into the pockets of consumers, improving their cashflow.The increase in the money supply will lead to an increase in consumer spending. This will be lead to an increase in demand which will consequently cause a rise in equilibrium price. At a high price, less is purchased. There will be a decrease level of real GDP due to the decrease in aggregate demand.

(iii)An appreciation of Ringgit Malaysian (RM) will cause the relative price of domestic goods and services to increase while the relative price of foreign goods and services falls. The change in relative prices will decrease Malaysian exports and increase its imports.GDP measures domestic production, so imports have no effect on Malaysian GDP.