Answer to Question #227001 in Macroeconomics for perera

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)

An increase in tendency of money saving by household leads decrease in expenditure on consumer goods. This shifts the aggregate demand leftwards from AD to AD1

Consequently, equilibrium point shifts to E1 from E

There is a fall in price level from P to P1 and the output level declines to Q1 from Q. A fall in price level causes a fall in the consumer expectations regarding future prices in the long run.

b)

 A prolonged period of unfavorable weather conditions hampers agriculture reducing the aggregate supply in the short run.

Initially the economy was at E. Aggregte supply does not shift in the long run if the policy makers adopt the changes. In the short run, the aggregate supply shifts leftwards from AS to AS1. this shifts equilibrium from E to E1 rising corresponding prices from P to p1 decreasing the output to Q1 from Q.

c)

Increased job opportunities overseas cause many people to leave the country leads to a decline in the aggregate supply in the short run. Aggregate demand falls as well because of fewer consumption of goods and services.

There is a shift in the equilibrium point leftwards from E to E1 consequently decreasing the output from Q to Q1