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TUTORIAL 09 - Aggregate Demand and Aggregate Supply

The document discusses the concepts of aggregate demand (AD) and aggregate supply (AS) in economics, including reasons for the downward slope of the AD curve and the upward slope of the AS curve. It also analyzes the impacts of various events on AD and AS, such as changes in household saving behavior and agricultural disruptions. Additionally, it examines the effects of the Covid-19 pandemic on both AD and AS in the U.S. economy, highlighting shifts caused by decreased spending and production disruptions.

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Samantha M. Jones
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7 views2 pages

TUTORIAL 09 - Aggregate Demand and Aggregate Supply

The document discusses the concepts of aggregate demand (AD) and aggregate supply (AS) in economics, including reasons for the downward slope of the AD curve and the upward slope of the AS curve. It also analyzes the impacts of various events on AD and AS, such as changes in household saving behavior and agricultural disruptions. Additionally, it examines the effects of the Covid-19 pandemic on both AD and AS in the U.S. economy, highlighting shifts caused by decreased spending and production disruptions.

Uploaded by

Samantha M. Jones
Copyright
© © All Rights Reserved
We take content rights seriously. If you suspect this is your content, claim it here.
Available Formats
Download as PDF, TXT or read online on Scribd
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INTRODUCTORY ECONOMICS/PRINCIPLES OF ECONOMICS SEPT 2024

Tutorial 09
Aggregate Demand and Aggregate
Supply
Question 1

The following diagram shows an aggregate demand curve and an aggregate supply curve.

Price level
AS

AD

National output

(a) Label the two axes.

(b) Give three reasons why the AD curve is downward sloping.


Exchange-Rate Effect As the (domestic) price level rises, people will buy more imports and demand fewer domestic goods.
1. ..............................................................................................................................................
As the price level rises, people will need more money to pay for goods. The extra demand for money will drive up
Interest-Rate Effect
interest rates and dampen demand.
2. ..............................................................................................................................................
As the price level rises, the value of people’s wealth will be eroded. They may therefore save more (and
Wealth-Income Effect
3. hence demand fewer goods) to help restore the value of their savings.
..............................................................................................................................................

(c) Why is the AS curve upward sloping (at least in the short run)?
Higher prices will encourage firms to produce more (assuming that factor prices do not rise as rapidly as the
prices of goods and services)
.................................................................................................................................................

Question 2

Explain whether each of the following events shifts the short run aggregate demand, aggregate supply,
both or neither.

(a) Households decided to save a larger share of their income.

If households decide to save a larger share of their income, they must spend less on consumer goods, so
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the aggregate-demand curve shifts to the left. The equilibrium changes causing the price level and output to
decline.
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INTRODUCTORY ECONOMICS/PRINCIPLES OF ECONOMICS APRIL 2024

(b) Increased job opportunities overseas cause many people to leave the country.
If increased job opportunities cause people to leave the country, the short-run aggregatesupply curve will shift
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to the left because there are fewer people producing output. The aggregate-demand curve will also shift to the
left because there are fewer people consuming goods and services. The result is a decline in the quantity of
---------------------------------------------------------------------------------------------------------------
output. Whether the price level rises or declines depends on the relative sizes of the shifts in the aggregate-
demand curve and the aggregate-supply curve
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(c) Florida orange crops suffer a prolonged period of below-freezing temperatures.


If Florida orange crops suffer a prolonged period of below-freezing temperatures, the orange harvest will be
---------------------------------------------------------------------------------------------------------------
reduced. This decline in the natural level of output is represented by a shift to the left in the short-run
aggregate-supply curve. The equilibrium changes, so the price level rises and output declines.
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Question 3

In 2020, the Covid-19 pandemic triggered an unprecedented economic downturn. This recession had
several unique characteristics: it was caused by an infectious disease, it was notably swift and severe,
and it was a deliberate result of government-mandated changes in behaviour that significantly reduced
output and employment.

Analyse the impact of the Covid-19 recession on the aggregate demand and aggregate supply in the
U.S. economy.

Aggregate Demand (AD):

The COVID-19 pandemic led to a significant reduction in consumer and business spending due to uncertainties and
-------------------------------------------------------------------------------------------------------------------------
lockdown measures. This caused the AD curve to shift leftward. Factors contributing to this shift included decreased
consumer confidence, reduced household incomes, and lower investment by businesses.
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-------------------------------------------------------------------------------------------------------------------------
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Aggregate Supply (AS):


The AS curve also shifted leftward due to disruptions in production, supply chain issues, and closures of business
-------------------------------------------------------------------------------------------------------------------------
mandated by the government. The pandemic directly impacted labor supply, reduced workforce productivity, and cause
shortages of inputs necessary for production
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