Question

1. Using aggregate supply and demand analysis, discuss how the following will affect the aggregate level of output and the price level in the economy. Use an SRAS curve and an AD curve. You need to determine whether the AD or SRAS curve will shift, in which direction it will shift, and how this will affect aggregate output and the price level. (8 points) a. A hurricane that destroys half the supply of goods produced in Florida. b. An increase in wage rates. c. An increase in labor productivity nation-wide. d. An unanticipated increase in the money supply

Answer 1

1. a) A horsicane destroys half the supply of goods produced > SRAS will & → SRAS curve will Shift leftward equilibrium price Level will ↑ and aggregate output will v. S RAS Price Level SRASR SRASI AD aggregate output by An þ im wage seate increases cost of hiring labon => it p cost of production > SRAS will & Shifting the SRAS ceftward - equilibrium price level will ↑ and aggregate output will t. a SRAS2 Plaice level SRAS, K AD 72 Yi Aggregate output

e An ↑ in labor productivity increases &RAS, shifting the SRAS Curve nightward. As a result, equilibrium Price Level & and aggregate output p. Price level -SRASI X SRAS2 P2 D AD. Y Y2 Aggregate Output dy An unanticipated p in money supply increases LAD because now people have more money to Spend. AD curve shifts right word. As a result, both equilibrium price level and aggregate output go up. Price level SRAS AD2 AD AD x 72 Aggregate output