Question

• draw an aggregate demand and aggregate supply diagram to illustrate your answer • show the...

• draw an aggregate demand and aggregate supply diagram to illustrate your answer

• show the change in aggregate demand and/or aggregate supply •

describe the change(s) you have shown • explain why the adjustments you have described occur.

1. Suppose that there is an expansion of private consumption due to increased optimism about future growth prospects for the economy.

(i) Illustrate and explain the effect of this shock in the short-run.

(ii) What is the long-run effect likely to be on output and the price level?

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