Answer to Question #234784 in Macroeconomics for Soma

Question

Explain whether each of the following events shifts the short-run aggregate supply curve, the aggregate demand curve, both, or neither. Draw a diagram to show what happens to output and the price level in Pakistan, assuming policymakers take no action.

a. The Karachi stock market declines sharply, reducing consumers’ wealth. (1.5 Marks, Maximum 150 words)
b. A severe Flood damages factories along the Indus River. (1.5 Marks, Maximum 150 words)
c. Pakistan experiences a wave of immigration (1.5 Marks, Maximum 150 words)
d. A boom overseas causes foreigners to buy more Pakistan goods. (1.5 Marks, Maximum 150 words)
e. State Bank of Pakistan increases the policy rate (Interest rate). (1.5 Marks, Maximum 150 words)

Answer 1

(a) Aggregate demand curve will shift to the left because consumers will have to consume less.

(b) Aggregate supply curve will shift to the left indicating a decrease in supply because the process of production will be cut down.

(c) Aggregate demand curve will shift to the right because the level of demand will be increased due to increase in the number of consumers.

(d)Both the aggregate demand curve and the aggregate supply curve will shift to the right. This is because of increase in demand that will also make suppliers to supply more.

(e) Aggregate demand curve will shift to the left because the public will hold lower real balances and therefore their demand level will be lowered.