e What would the tax per tonne need to be to reduce the quan

e) What would the tax per tonne need to be to reduce the quantity of firewood sold to 1000 tonnes? Show this on your diagram. (2 marks) Explain one alternative policy the government could use to reduce the quantity of firewood sold. (2 marks) f) B2. With the aid of clearly labelled diagrams, explain how the following events would affect the aggregate demand curve and explain the short-run impact on output and inflation. a) Lower interest rates. (3 marks) b) A decrease in net exports. (3 marks) c) A decrease in the expected inflation rate. (3 marks) d) Slower income growth in other countries. (2 marks) e) A decrease in imports. (2 marks)

Solution

The equation of the aggregate demand curve is given by:

AD/Y = C + I + G + (X-M)

a) A lower inteerst rate will lead to an incraese in investment (I) in the economy, thus shifting the AD curve rightwards. In the new equilibrium, output and inflation are higher.

b) A decrease in net exports (X-M) will lead to a leftward shift in the AD curve, intersecting the AS curve at a lower equilibrium output and lower inflation level.

c) Decrease in expected inflation does not affect the AD curve but rather the AS curve by shifting the AS curve rightwards, thus incraesing output and lowering actual inflation.

d) A slower income growth in other countries will lead to a fall in the demand ofr our exports, thus shifting the AD curve leftwards and the new equilibrium being attained at a lower output and lower inflation level.

e) A decrease in imports (M) will shift the AD curve rightwards, thus increasing inflation and equilibrium output.