AS2 Price level Price level AD Real domestic output Real dom

AS2 Price level Price level AD Real domestic output Real domestic output (A) (B) Price level Price level \'Real domestic output AD AD Real domestic output (D) (C) a) (2 points) Which of the above diagrams best portrays the effects of an increase in consumer spending? . b) (2 points) Which of the above diagrams best portrays a downward shift in desired aggregate expenditure? . . c) (2 points) Which of the above diagrams best portrays a rise in input prices? t . . d) (2 points) Which of the above diagrams best portrays the introduction of improved production technology? . e) (2 points) Which of the above diagrams best portrays expansionary fiscal stimuluse .

Solution

a) When consumer spending is increased aggregate demand will be increased. AD curve shifts to the right from AD1 to AD2. Graph C best portrays this effect.

b) downward shift of the desired aggregate expenditure denotes the decrease in aggregate demand. that is Ad curve shifts to the left from AD1 to AD2. Graph D best portrays this effect.

c) A rise in input price means an increase in the cost of production. so aggregate supply will be decreased. As curve shifts to the left from AS1 to AS2. Graph B best portrays this effect.

d) The introduction of best production technology increases the aggregate supply as the average cost of production reduced because of new technology. AS curve shifts to the right from AS1 to AS2. Graph A best portrays this effect.

e) aggregate demand will be increased by an expansionary fiscal stimulus. AD curve shifts to the right from AD1 to AD2. Graph C best portrays this effect.