Answer to Question #235555 in Macroeconomics for Samra

Question

What effects would each of the following have on aggregate demand or aggregate supply? In each case use a diagram to show the expected effects on the equilibrium price level and level of real output. Assume that all other things remain constant.
a. A widespread fear of depression on the part of consumers.
b. A $2 increase in the excise tax on a pack of cigarettes.
c. A reduction in interest rates at each price level.
d. A major increase in federal spending for health care.
e. The expectation of rapid inflation.
f. The complete disintegration of OPEC, causing oil prices to fall by one-half.
g. A 10 percent reduction in personal income tax rates.
h. A sizable increase in labour productivity (with no change in nominal wages).
i. A 12 percent increase in nominal wages (with no change in productivity).
j. Depreciation in the international value of the dollar.

Answer 1

a. A widespread fear of depression on the part of consumers.

Aggregate demand shits to left,output price decrease.

b. A $2 increase in the excise tax on a pack of cigarettes.

Aggregate supply shits to left ,output decreases and price rises.

c. A reduction in interest rates at each price level.

Aggregate demand shits to right ,output and price increases.

d. A major increase in federal spending for health care.

Aggregate demand shits to right,output increases and price rise.

e. The expectation of rapid inflation.

Aggregate demand shits to right,output increases and price rise.

f. The complete disintegration of OPEC, causing oil prices to fall by one-half

Aggregate supply shits to right,output increases and price falls.

g. A 10 percent reduction in personal income tax rates.

Aggregate demand shits to right ,output and price increases.

h. A sizable increase in labour productivity (with no change in nominal wages).

Aggregate supply shits to right,output increases and price falls.

i. A 12 percent increase in nominal wages (with no change in productivity).

Aggregate demand shits to right ,output and price increases.

j. Depreciation in the international value of the dollar.

Aggregate supply shits to left ,output decreases and price rises.