Answer to Question #226186 in Macroeconomics for ramya

Question

Explain whether each of the following events shifts the short-run aggregate supply curve, the aggregate demand curve, both or neither. For each event that does shift a curve, draw a diagram to illustrate the effect on the economy.

a)   Households decide to save a larger share of their income.

b)   Sri Lankan farmers suffer a prolonged period of unfavorable weather conditions for agriculture.

c)    Increased job opportunities overseas cause many people to leave the country.  

Answer 1

a) When the households choose on saving more, they will have to spend less income on the consumer goods making aggregate demand curve to shift towards the left side.

b) when there is unfavorable conditions, production will also decrease. The consumer spendings will therefore decrease, decreasing the aggregate demand.

c) Increased job opportunities overseas decreases both the aggregate demand and supply.