Answer to Question #226748 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. Households decide to save a larger share of their income that causes a decrease in the aggregate demand curve. It means the aggregate demand curve shifts leftward such that both price level and output decrease in an economy.

b. Sri Lankan farmers suffer a prolonged period of unfavorable weather conditions that causes a decrease in the aggregate supply curve. It results in an increase in price level and an increase in quantity in an economy.

c. Increased job opportunities overseas cause many people to leave the country causes a decline in the aggregate supply curve. It increases the price level and decrease output.