Answer to Question #245357 in Macroeconomics for Zarah

Question

'Policymakers who can influence AD cannot offset the adverse effects of a recession due to a fall in AS'. Do you agree with statement? Explain your answer in words and using an AD-AS diagram. Explain

Answer 1

Solution:

Yes, I agree with the above statement.

Aggregate demand refers to the amount of goods and services demanded by households. Governments, private firms, and even foreign markets. The aggregate demand corresponds to the price levels in the economy.

Therefore, policymakers trying to influence the aggregate demand would result in an increased price level. When the demand increases, it results in a chain of increasing employment income and output. With this aggregate increase in demand, income, employability, and output would result in an increased inflation rate and high unemployment rate which would lead the economy into a recession.

 

This is displayed by the below graph:

In the above graph, when the aggregate demand increases and the aggregate demand curve shifts to the right, the Philips curve moves upwards and adjusts at a higher inflation and unemployment rate.