BUS 930 – The aggregate demand (AD)

Subject: Economics    / General Economics
Question

Use the aggregate demand (AD) and aggregate supply (AS) model of the U.S. to show and discuss the effects of the following events on real output (Y), general price level (P), and employment, in the short run and in the long run. Assume that economy is initially in full employment at point A, that prices and wages are sticky in the short run but flexible in the long run, that there is no counteracting fiscal or monetary policy. Treat each case separately, and in each case explain how and in what ways the aggregate demand and/or aggregate supply will be affected. Clearly label your diagrams and show the direction of changes in each case.

Price level LRAS

SRAS

P A

AD

Real GDP (Y)

YN
Because of the increased global supply of oil, and disagreement among OPEC members on limiting the oil production, oil prices fall dramatically. Construction of new homes rises, greatly increasing investment in new homes. The value of the U.S. dollar falls against the Japanese yen. In response to increasing uncertainty about the economy, U.S. consumer confidence keeps falling for three consecutive quarters. In order to stimulate the economy, the Congress enacts a 10 percent reduction in personal income taxes.The Federal Reserve conducts an expansionary monetary policy by reducing the federal funds rate.As promised by President Trump, there is increased spending on national defense and infrastructure.A sharp decline in the rate of growth of income in European Union countries

reduces their demand for American products.