Question

Explaining Macroeconomic Trends and Fluctua (Study Plan 10.3) Use the following graph to work Problems 6 to 8, Initially, the short-run aggregate supply curve is SAS and the aggregate demand curve is ADo LAS SAS 8115 SAS 110F 105F 100 95 AD ADO 0.8 1.0 1.2 Real GDP (trillions of 2009 dollars 6. Some events change aggregate demand from AD to AD. Describe two events that could have cre- ated this change in aggregate demand. What is the equilibrium after aggregate demand changed? If potential GDP is $1 trillion, the economy is at what type of macroeconomic equilibrium?

Answer 1

The graph shows a rightward shift of the aggregate demand curve , the rightward shift shows the expansion of the economy. There is a lot reasons to shift the aggregate demand curve to the right. The best possible two given below.

• Expansionary fiscal policy. - The expansionary fiscal policy shifts the aggregate demand curve to the right this is when the government increases the expenditure or decrease taxes. The expansionary policy injects more purchasing power into the hands of people and there by increasing the consumption and the investment activities. Since these two are the components of the AD curve , the AD curve shifts to the right.
• Lower interest rate.- The lower interest rate also can shift the aggregate demand curve to the right. The interest rate is the cost of borrowing so when the interest rate is low the people borrow more for investment and consumption purposes and this would shift aggregate demand curve.
• If the GDP at $1 million the economy is at the full employment level of equilibrium.