Answer to Question #227329 in Macroeconomics for Madushika Nilmini

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 increased tendency by the households to save a larger share of their income implies less consumption by reducing expenditure for each household. This will make the short-run aggregate demand curve to shift to the left since people are not consuming. The output will reduce from Q0 to Q1 and the price will also reduce from P0 to P1 due reduced demand of goods and services.

b) A prolonged period of unfavorable weather conditions for agriculture will reduce the supply in the market. This will shift the short run aggregate supply curve to left thus reducing the output and increasing the from P0 to P1.

c)  Increased job opportunities overseas will make a substantial number of workers to move out and thus reduce production thus reducing the short run aggregate supply and shifting the curve to the left. On the other hand, the aggregate demand will decrease since the number of people have reduced.