What Is the Effect on AD?

Determine the effect on the short-run aggregate demand (AD) curve for each of the following scenarios and sketch a graph to illustrate each answer.

1.      A decrease in consumer wealth is due to a plunge in stock prices.

2.      Households  and  businesses  have  more  optimistic expectations  regarding future economic performance.

3.      There are higher levels of investment spending by businesses.

4.      The government cuts taxes for households and businesses.

5.      The Fed decreases the money supply.

Handout 31-1 (10 Points)

Understanding SRAS and LRAS

Determine the effect on the short-run aggregate supply (SRAS) curve for each of the following scenarios. Draw the graph. Remember to accurately label all lines, points, and axes when drawing the graphs for these exercises.

1.      Labor productivity increases in the macroeconomy.

2.      An earthquake destroys a significant amount of infrastructure in the economy.

3.      Technological progress occurs in the economy.

Answer the following questions.

4.      Why is the LRAS curve vertical?

5.      Can the LRAS curve shift?

Handout 32-1 (20 Points)

Complete the following exercises.

1.     Draw  a  short-run AD–AS  graph  showing  the  effect  of a  severe drop in  stock prices that decreases households’ and businesses’ wealth. Indicate the effect on the equilibrium aggregate price level and equilibrium aggregate output.

2.     Draw a short-run AD–AS graph showing the effect of a significant decrease in the world supply of oil. Indicate the effect on the equilibrium aggregate price level and equilibrium aggregate output.

3.     Draw an AD–AS graph showing a recessionary gap.

4.     Draw an AD–AS graph showing an inflationary gap.