Question

1) Diagram the following change in AD & AS below. Congress appropriates funds for NASA to develop 175 next generation GPS satellites and have them placed into orbit by private contractors SAS NOOP 2) Diagram the following change in AD & AS below. Changes in climate cause a worldwide shortage of coffee beans, prices subsequently soar. Coffee is an input in the production of all coffee drinks as well other foods. How would this impact the economy? SAS

Answer 1

1. With increase in government spending , the Aggregate demand in the economy will increase. Here more funds for the development of satellites, will increase production in the economy. As we can see the chart below, when government spending increases , the demand curve shifts to the right from D to D1. Equlibrium quantity will increase from Q1 to Q2. The new equlibrium level moves from A to B.  

一日 01 02

2. Shift in demand/ supply curve (increase or decrease) takes place due to change in other factors other than price of the product. Here due to natual calamities , there is shortage of coffee beans. This shortage will result in supply curve of coffee beans to shift towards left, increasing prices from P1 to P2 (cost push inflation). The quantity supplied will also fall. The new equilibrium level will shift from A to B.