Answer to Question #197797 in Macroeconomics for antonio

Question

What appen, f a reduction in aggregate supply is followed by an increase in aggregate demand

Answer 1

A reduction in aggregate supply (AS) is mostly attributed increase in exogenous factors such taxation, factor costs such as of labor (L) and capital (C) among others. If these events occur leading to reduced (AS), followed by such events as increase in government spending, increase in money stock and decrease in interest rates and taxation (expansionary monetary policies) leading to increase in aggregate demand (AD), there's a likelihood of shortages leading to demand pull inflation; where prices of commodities will be pulled as more will be demanded.

The diagram below illustrate the above phenomenon: