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Other things equal, what effects would each of the following have on aggregate demand or aggregate supply? In each

case use a diagram to show the expected effects on the equilibrium price level and the level of real output.  

·        a. A reduction in the economy's real interest rate. The aggregate demand curves to the right and output and the price level are up.

·        b. A major increase in federal spending for health care (with no increase in taxes). The aggregate demand curves to the right and output and price level are up.

·        c. The complete disintegration of OPEC, causing oil prices to fall by one-half. The aggregate supply curves to the right and output up and price level are down.

·        d. A 10 percent reduction in personal income tax rates (with no change in government spending). The aggregate demand curves to the right and output and price are level up.

·        e. A sizable increase in labor productivity (with no change in nominal wages). The aggregate supply curves to the right and output up and price level are down.

·        f. A 12 percent increase in nominal wages (with no change in productivity). The aggregate supply curves to the left and output down and price level are down.

·        g. A sizable depreciation in the international value of the dollar. The aggregate demand curves to the right and the aggregate supply curves to the left.

 

Top Answer

a)Reduced real interest rate reduces the cost of funds and consumer can borrow cheaply, increasing demand hence a... View the full answer

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