Question

a) Provide a factor that would shift the long-run aggregate supply (LRAS) curve to the right.

What does this shift in LRAS imply for aggregate output? Use the Aggregate Demand and Supply

model to illustrate this event. Make sure you properly label all the axes and curves. (You only need

to draw a shift in LRAS curve, no need to draw other curves).

b) Provide a factor that would shift the short-run aggregate supply (SRAS) curve upward (and to

the left). What does this shift in SRAS imply for inflation rate? Use the Aggregate Demand and

Supply model to illustrate this event. Make sure you properly label all the axes and curves. (You

only need to draw a shift in SRAS curve, no need to draw other curves).

Answer 1

a) A factor that would shift the long run supply curve ( LRAS) Curve to the right-------

Increase in the Factors of production ( land, labour, capital)

* The shift in LRAS implies that aggregate output will increase.

GRAPH (a) ERAS LRAS Saturday GENERAL PRKE LEVEG POTENTIAL REAL GDP SRAS" GRAPH (6] ed i SRAR LOC Sunday RI REAL GDP

See the graph (a)-------

Along x axis, real output.

Along yaxis, general price level

Aggregate demand ( AD) Curve is negetively sloped

LRAS is vertical line along y axis, Because in the long run ,all factors are Fully employed.

With LRAS shifting rightward, the Equilibrium point emerges E¹ due to intersaction of LRAS¹ & AD

The potential real output increases

b) A Factor that would shift the short run aggregate supply ( SRAS) Curve upwards to the left----see graph (b)

Increase in the input price

( Increase in input price,say price of raw material ,raises cost of production and Decreases Profit margin, thats why's SRAS curve shifts leftwards.)

* This shift in SRAS imply for Inflation rate that-----

Inflation rate will rise

( Reason------

SRAS is upward sloping curve in the short run.

AD curve cuts at point E, forming Equilibrium output Y and Equilibrium price i

With rise in input price , AS will shift leftward and new equlibrium point comes to E¹

It makes real output Y¹( decreased)

Price level goes up to i¹

As price level Increases, and real GDP decreases, it means the Inflation rate has risen