Use the aggregate demand (AD) and aggregate supply (AS) model to show and discuss the effects of the following events on real output (Y), general price level (P), and employment, in the short run and in the long run. Assume that economy is initially in full employment at point A, that prices and wages are sticky in the short run but flexible in the long run, that there is no counteracting fiscal or monetary policy. Treat each case separately, and in each case explain why and in what ways the aggregate demand and/or aggregate supply will be affected.
Price level (P) LRAS
SRAS
P A YN = potential GDP
AD
Real GDP (Y)
YN
a. Because of the increasing tension between Russia and Ukraine, oil prices rise dramatically.
b. With greater confidence in the economy, investment in residential and business construction increases. c. The value of the U.S. dollar continues to rise against the euro and the Japanese yen.
d. In response to increasing uncertainty about the economy, consumer confidence keeps falling for three consecutive quarters.
e. In order to stimulate the economy, the Congress enacts a 10 percent reduction in personal income taxes.
f. The Federal Reserve conducts an expansionary monetary policy by lowering the federal funds rate.
g. A sharp decline in the rate of growth of income in European Union countries reduces their demand for American products.