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SOLUTIONS TO SAMPLE ANALYTICAL QUESTIONS (1)

The document discusses the impact of various economic factors on aggregate demand (AD) and short-run aggregate supply (SRAS). It explains how changes in income tax, currency depreciation, wage increases, expected future prices, and power shortages can shift the AD and SRAS curves, affecting equilibrium price levels and real GDP. Overall, it highlights the relationship between these factors and their influence on economic equilibrium.

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Eshrat Tarabi Shimla 2211281030
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10 views5 pages

SOLUTIONS TO SAMPLE ANALYTICAL QUESTIONS (1)

The document discusses the impact of various economic factors on aggregate demand (AD) and short-run aggregate supply (SRAS). It explains how changes in income tax, currency depreciation, wage increases, expected future prices, and power shortages can shift the AD and SRAS curves, affecting equilibrium price levels and real GDP. Overall, it highlights the relationship between these factors and their influence on economic equilibrium.

Uploaded by

Eshrat Tarabi Shimla 2211281030
Copyright
© © All Rights Reserved
We take content rights seriously. If you suspect this is your content, claim it here.
Available Formats
Download as PDF, TXT or read online on Scribd
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P

SRAS 2

SRAS1

P2
P1

AD1
AD2
Q
Q2 Q1

IF THE GOVERNMENT INCREASES INCOME TAX,


CONSUMPTION GOES DOWN, AD CURVE SHIFTS
LEFTWARDS FROM AD1 TO AD2.

IF THE ECONOMY SUFFERS FROM EXTREME


DROUGHT, THIS IS CONSIDERED AS AN ADVERSE
SUPPLY SHOCK. SRAS CURVE SHIFTS LEFTWARDS
FROM SRAS 1 TO SRAS 2.

THEREFORE, THE EQUILIBRIUM PRICE LEVEL GOES


UP FROM P1 TO P2 AND EQUILIRBIUM RGDP
GOES DOWN FROM Q1 TO Q2.
2.

IF THE DOMESTIC CURRENCY DEPRECIATES,


EXPORTS WILL GO UP AND IMPORTS WILL GO
DOWN, AS A RESULT NX WILL INCREASE AND AD
CURVE WILL SHIFT TO THE RIGHT.

IF THERE IS OPTIMISM ABOUT FUTURE BUSINESS


SALES, INVESTMENT WILL INCREASE AND AD
CURVE WILL SHIFT TO THE RIGHT.

SRAS1
P2
P1
AD2
AD1
Q1 Q2

BOTH THE PRICE LEVEL AND RGDP WILL INCREASE


FROM P1 TO P2 AND Q1 TO Q2 RESPECTIVELY.
3.

IF WORKERS BARGAIN FOR 20% INCREASE IN


WAGES, COST OF PRODUCTION WILL INCREASE,
PROFITS WILL GO DOWN AND SRAS CURVE WILL
SHIFT TO THE LEFT FROM SRAS1 TO SRAS2.

IF INTEREST RATE GOES UP, CONSUMPTION AND


INVESTNMENT WILL GO DOWN AND AD CURVE
WILL SHIFT INWARDS FROM AD1 TO AD2.
SRAS2
SRAS1
P2
P1

AD1
AD2
Q2 Q1
AS A RESULT, PRICE LEVEL IN THE ECONOMY WILL
GO UP AND RGDP WILL GO DOWN.
4. SRAS2
SRAS1
P2

P1

AD2
AD1
Q2 Q1

IF EXPECTED FUTURE PRICE IS GOING UP,


CONSUMPTION TODAY WILL INCREASE. AS A
RESULT, AD CURVE WILL SHIFT RIGHTWARDS
FROM AD1 TO AD2.

AS PRICE OF NON LABOR INPUTS HAVE GONE UP


BY 20%, COST OF PRODUCTION WILL INCREASE
AND PROFIT WILL DECREASE. SRAS CURVE WILL
SHIFT TO THE LEFT FROM SRAS1 TO SRAS2.

THEREFORE, PRICE LEVEL WILL INCREASE FROM


P1 TO P2 AND RGDP WILL DECREASE FROM Q1 TO
Q2.
5.

SINCE THERE IS A POWER SHORTAGE,


PRODUCTIVE POTENTIAL WILL GO DOWN AND
SRAS CURVE WILL SHIFT LEFTWARDS FROM SRAS1
TO SRAS2.

IF FOREIGN REAL NATIONAL INCOME GOES UP,


DEMAND FOR DOMESTIC GOODS WILL GO UP.
THIS WILL INCREASE EXPORTS AND NX WILL GO
UP. AD CURVE WILL SHIFT
OUTWARDS/RIGHTWARDS FROM AD1 TO AD2.
SRAS2
P2 SRAS1

P1
AD2
AD1

Q2 Q1

THEREFORE, EQUILIBRIUM PRICE LEVEL WILL GO


UP FROM P1 TO P2 AND EQUILIBRIUM LEVEL OF
RGDP WILL GO DOWN FROM Q1 TO Q2.

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