Answer to Question #183851 in Macroeconomics for Cleopatra

Question

How to illustrate the AD-AS model the impact of strike on the general price level and the level of real production and income in the economy

Answer 1

Solution:

The AD-AS (aggregate demand-aggregate supply) model illustrates national income determination and changes in the price level.

A strike will lead to low productivity resulting in high price increases after the strike due to loss inventories and other losses. As the price level of output increases, aggregate supply rises, and aggregate demand falls until the equilibrium point is reached.

The level of real production will decrease due to a decrease or lack of labor in the production plants. Income in the economy will also decrease since the employees who are on strike will lose their pay due to the no work no pay principle.

Therefore, AD will decrease and it will shift to the left on the AD-AS model. On the other hand, AS will rise due to the higher prices and therefore, shift to the right on the AD-AS model.