Here is the question and the answers. But I need an explanation of WHY the answer is what it is. Any answers that don't answer why for each one will only get 1 star.
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 labor 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.
ANSWERS
(a) AD curve left, output down and price level down (assuming no ratchet effect).
(b) AS curve left, output down and price level up.
(c) AD curve right, output and price level up.
(d) AD curve right, output and price level up (any real improvements in health care resulting from the spending would eventually increase productivity and shift AS right).
(e) AD curve right, output and price level up.
(f) AS curve right, output up and price level down.
(g) AD curve right, output and price level up.
(h) AS curve right, output up and price level down.
(i) AS curve left, output down and price level up.
(j) AD curve right (increased net exports); AS curve left (higher input prices)
Here is the question and the answers. But I need an explanation of WHY the answer is what it is. Any answers that don't answer why for each one will only get 1 star.
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 labor 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.
ANSWERS
(a) AD curve left, output down and price level down (assuming no ratchet effect).
(b) AS curve left, output down and price level up.
(c) AD curve right, output and price level up.
(d) AD curve right, output and price level up (any real improvements in health care resulting from the spending would eventually increase productivity and shift AS right).
(e) AD curve right, output and price level up.
(f) AS curve right, output up and price level down.
(g) AD curve right, output and price level up.
(h) AS curve right, output up and price level down.
(i) AS curve left, output down and price level up.
(j) AD curve right (increased net exports); AS curve left (higher input prices)
