AS Schedule?

Question

lllustrate how each of the following events would shift the AS schedule and potential RGDP, thereby altering equilibrium prices and output levels in the economy. Use an aggregate supply-aggregate demand diagram in your explanation and assume that the economy is initially at full employment. Note: Although some of the events listed below will also shift AD conditions in the economy, you do not need to show AD shifts in answering this question. We will discuss AD shifts in next week's lesson.

a) an increase in the general level of money wages

b) an increase in the price of imported oil and related energy products.

c) a decrease in the level of US interest rates

d) an increase in the productivity of labor

e) an increase in the expected inflation rate

f) an increase in the labor force growth rate

Answer 1

a) an increase in the general level of money wages

This will shift AD higher thus increasing price level - and at the same time will shift up SRAS (due to higher costs of production). In general first there will be higher price level and RGDP in short-run, in long-run only price level will rise.

b) an increase in the price of imported oil and related energy products.

Left-ward shift of AS (both short and long-run) - so price level up and RGDP down

c) a decrease in the level of US interest rates

Capital outflow -thus less investment and consequently fall in RGDP - prices up. AS-up

d) an increase in the productivity of labor

Fall in RGDP - low-productivity-push inflation. AS up/left.

e) an increase in the expected inflation rate

RGDP unaffected - series of consequent upward shifts of both AS and AD

f) an increase in the labor force growth rate

AS right thus rise in RGDP and may-be fall in price level, bur AD will go right too due to increase in income.