Determine whether each of the following would cause a shift in the aggregate demand curve, the aggregate supply curve, neither, or both. Which curve shifts, and in which direction? What happens to aggregate output and the price level in each case?
a. The price level changes
b. Consumer confidence declines
c. The supply of resources increases
d. The wage rate increases
Take a shot. Hint I think each case has a different answer (i.e, there one supply shift, one demand shift, one neither, one both). Repost if you are still having questions
Is this correct?
Determine whether each of the following would cause a shift in the aggregate demand curve, the aggregate supply curve, neither, or both. Which curve shifts, and in which direction? What happens to aggregate output and the price level in each case?
a. The price level changes (they both shift)
b. Consumer confidence declines (neither)
c. The supply of resources increases - aggregate supply curve shifts to the right
d. The wage rate increases - aggregate demand curve shifts to the right
zero for 4. But good try.
a) Price level changes are movements along the curves - they do not shift the curves. (Price may have changed because of a shift, but that is another issue).
b) with declining consumer confidence, people are "leery" about the future, they buy less especially big-ticket items. Aggregate demand shifts inward (left).
c) resources are inputs to production. When input prices go up, suppliers supply less at any given price. Aggregate supply shifts left (inward).
d) wage increase is an input price. So aggregate supply shifts left. However, higher wages means higher income which leads to an increase in demand for more good+services. Aggregate demand shifts out.
Actually the supply would increase for C since the supply of resources increases
a. The price level changes - This does not cause a shift in either the aggregate demand or aggregate supply curve. It only leads to a movement along the curves.
b. Consumer confidence declines - This causes a shift in the aggregate demand curve to the left. People are less willing to spend, so aggregate output decreases and the price level decreases.
c. The supply of resources increases - This causes a shift in the aggregate supply curve to the right. With more resources available, firms can produce more, so aggregate output increases and the price level decreases.
d. The wage rate increases - This causes a shift in both the aggregate demand and aggregate supply curves. The increase in wages leads to higher production costs, causing the aggregate supply curve to shift to the left. However, higher wages also mean higher income, which increases consumer spending and shifts the aggregate demand curve to the right. The overall effect on aggregate output and the price level will depend on the magnitude of these shifts.
a) The price level changes - Neither the aggregate demand curve nor the aggregate supply curve shifts. This is a movement along the curves, not a shift. The aggregate output and the price level may change, but it depends on the specific circumstances of the price change.
b) Consumer confidence declines - The aggregate demand curve shifts inward (left). This is because when consumer confidence declines, people are less likely to spend and buy goods and services, leading to a decrease in aggregate demand. As a result, aggregate output decreases, and the price level may decrease or remain unchanged, depending on the extent of the decline in demand.
c) The supply of resources increases - The aggregate supply curve shifts outward (right). When the supply of resources increases, it allows for a greater production capacity, leading to an increase in aggregate supply. As a result, aggregate output increases, and the price level may decrease or remain unchanged, depending on the extent of the increase in supply.
d) The wage rate increases - Both the aggregate demand curve and the aggregate supply curve shift. The aggregate supply curve shifts inward (left) due to the increase in wage rates, as higher wage rates increase production costs, leading to a decrease in aggregate supply. However, the aggregate demand curve also shifts outward (right) because higher wages lead to an increase in income, which in turn increases consumer spending and aggregate demand. The net effect on aggregate output and the price level will depend on the magnitude of the shifts in both curves. Aggregate output may increase if the increase in aggregate demand outweighs the decrease in aggregate supply, and the price level may increase or remain unchanged, depending on the extent of the shifts in supply and demand.
Let's go through each scenario again and determine the correct answer:
a. The price level changes - This does not cause a shift in either the aggregate demand curve or the aggregate supply curve. Changes in the price level result in movements along the curves, not shifts.
b. Consumer confidence declines - A decline in consumer confidence will lead to a decrease in consumer spending. This will cause a shift in the aggregate demand curve, specifically inward (to the left). As a result, both aggregate output and the price level will decrease.
c. The supply of resources increases - When the supply of resources increases, it allows for more production at any given price level. This causes a shift in the aggregate supply curve, specifically outward (to the right). As a result, aggregate output will increase while the price level will decrease.
d. The wage rate increases - An increase in the wage rate affects production costs and the cost of inputs. This will lead to a decrease in supply, as suppliers will supply less at any given price level. Therefore, the aggregate supply curve will shift inward (to the left). However, higher wages also result in increased disposable income for workers, leading to an increase in consumer spending. This causes a shift in the aggregate demand curve, specifically outward (to the right). As a result, aggregate output will decrease while the price level may increase or decrease depending on the magnitude of the shifts in the supply and demand curves.
So, to summarize:
a. The price level changes - Neither curve shifts. Movement along the curves.
b. Consumer confidence declines - Aggregate demand curve shifts inward (to the left). Aggregate output and the price level decrease.
c. The supply of resources increases - Aggregate supply curve shifts outward (to the right). Aggregate output increases, and the price level decreases.
d. The wage rate increases - Aggregate supply curve shifts inward (to the left). Aggregate demand curve shifts outward (to the right). Aggregate output may decrease, and the price level may increase or decrease depending on the shifts in the supply and demand curves.