Determine Whether Each Of The Following Would Cause A Shift

determine Whether Each Of The Following Would Cause A Shift Of The A

Determine whether each of the following would cause a shift of the aggregate demand curve, a shift of the aggregate supply curve, a shift in neither curve, or a shift in both curves. If a shift is caused, indicate which curve shifts, and in which direction it shifts. What happens to aggregate output and the price level in each case? The price level changes.

Consumer confidence increases. The supply of resources decreases. The wage rate decreases. There is no minimum word requirement for responses. Please label each section of your response with the appropriate number (1, 2, 3, 4).

Paper For Above instruction

The analysis of aggregate demand and aggregate supply shifts is fundamental in understanding macroeconomic fluctuations. Each scenario provided affects either the demand or supply side of the economy, leading to changes in overall economic output and price levels. This paper will evaluate three specific scenarios to identify their respective impacts on aggregate curves and the resulting economic outcomes.

1. Consumer confidence increases

An increase in consumer confidence significantly influences aggregate demand. When consumers feel optimistic about their financial prospects, they tend to spend more on goods and services, which shifts the aggregate demand (AD) curve outward/rightward. This demand increase raises both the overall price level and real output, assuming the economy is not at full capacity. The increased spending stimulates production and employment, invigorating economic activity. Therefore, this scenario causes a rightward shift of the AD curve, resulting in higher both in price levels and output.

2. The supply of resources decreases

A decrease in resource supply—such as reductions in the availability of raw materials, labor, or capital—hinders production efficiency. This contraction causes a leftward shift of the aggregate supply (AS) curve because producing goods and services becomes more costly or less feasible at existing price levels. The reduction in supply leads to higher prices (inflationary pressure) and lower output, a phenomenon often associated with stagflation. Thus, this scenario shifts the AS curve leftward, increasing the price level while decreasing aggregate output.

3. The wage rate decreases

A decrease in wages, a key component of production costs, affects the short-run aggregate supply. Lower wages reduce firms’ costs, enabling them to produce more at each price level, which causes the AS curve to shift rightward. The expansion in supply tends to lower the overall price level, leading to a deflationary effect, and increases output or real GDP. This scenario is consistent with increased productivity and potential economic growth, assuming other factors remain constant. Consequently, a decrease in wages causes a rightward shift of the AS curve, with lower prices and higher output resulting.

Comparison of Classical and Keynesian Economic Theories

The classical economic theory that predated the Great Depression was grounded in the belief that markets are self-correcting and that economies tend toward full employment equilibrium in the long run. Classical theory emphasizes the significance of flexible prices, wages, and interest rates that, when allowed to adjust freely, ensure that aggregate supply and demand are balanced naturally. Consequently, classical economists viewed unemployment as a temporary deviation caused by external shocks, expecting markets to restore equilibrium swiftly without government intervention. The classical view held that savings automatically translate into investments, and that markets generally operate efficiently without intervention.

In stark contrast, Keynesian economics emerged after the Great Depression, emphasizing that during downturns, markets could fail to clear, leading to prolonged periods of underemployment and unused capacity. Keynes challenged the classical assumption of flexible wages and prices, arguing that wages and prices are sticky downward, and thus, unemployment could persist without external intervention. Keynesian theory advocates for active government policies, including fiscal stimulus—such as increased government spending and tax cuts—to boost aggregate demand, stimulate employment, and restore full employment levels. The focus shifted from solely supply-side policies to managing demand to stabilize the economy.

The fundamental difference lies in their approach to market adjustments. Classical economics trusts in the self-correcting nature of markets, while Keynesian economics insists that active policy measures are necessary during economic downturns to stimulate demand and prevent prolonged recession or depression. This divergence underscores contrasting views on government intervention, with classical theory favoring laissez-faire policies, and Keynesian theory supporting proactive fiscal measures. The Keynesian perspective gained prominence during and after the Great Depression because it provided practical solutions to address the persistent unemployment and economic stagnation experienced during that period.

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