Answer to Question #227003 in Macroeconomics for pperera

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)

The aggregate demand curve shifts to the left because more of the disposable income is saved rather than consumed. This is shown by the following graph:

(b)

Neither the short run aggregate supply curve nor the aggregate demand curve is affected . This is because the given condition is prolonged and other alternatives will have to be adopted.

(c)

Short run supply curve will shift to the left. This is because the number of domestic workers will reduce and hence lower output and less supply to the market. This is illustrated by the following graph: