Question

Consider the market where aggregate demand (AD) and aggregate supply (AS) interact. Graphically illustrate the impact of each of the following events on price level and real GDP. See the instruction video, "AS & AD MODEL.ppsm".  Please also provide both written discussions and graphical analysis in each scenario to receive full credits

1. A fall in consumer confidence (Graphical Analysis + Written Discussions (100 words))
2. A rise in investment (Graphical Analysis + Written Discussions (100 words))

Answer 1

1

a

Fall in consumer confidence leads to building of the expectation of the gloomy economic outlook and it will lead to the increase in the tendency of spending less and save more among the consumers. It will cause aggregate demand to decrease and AD curve to shift to the left. As a result, price level will decrease as well as real output will also decrease. It sets the recessionary period in the economy where the unemployment rate increases lower consumer confidence reduces spending and it leads to decrease in supply and increase in lay offs. It sets a negative chain of action that makes economic downturn in the country.

b

Increase in investment is the symbol that aggregate demand in the economy is growing. It will cause aggregate supply curve to shift to the right and aggregate supply will increase. As a result, price level will decrease and real output level will increase. It is a positive scenario for the economy as increase in investments, will create jobs also for the people in the economy. It will put downward pressure upon the unemployment rate and it will decrease. So, people will have more money to spend and their purchasing power will increase. It will help economy to recover and then prosper in the coming period of time.