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How would GDP and unemployment be affected by a shift in aggregate demand and aggregate...

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yaga49 | (Level 1) Valedictorian

Posted March 2, 2013 at 11:45 AM via web

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How would GDP and unemployment be affected by a shift in aggregate demand and aggregate supply.

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pohnpei397 | College Teacher | (Level 3) Distinguished Educator

Posted March 2, 2013 at 2:40 PM (Answer #1)

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When looking at changes in aggregate supply (AS) and aggregate demand (AD), we have to think about them separately and imagine that only one of them is changing at a given time.  As they move, the impacts they have on gross domestic product (GDP) and unemployment will be inverse.  That is, a move that increases GDP will reduce unemployment and a move that decreases GDP will increase unemployment.  This is because a time when more people are working is generally a time when more goods and services are being produced.

If AD rises, the economy typically gets stronger.  Graphically speaking, an increase in AD is represented by a movement of the AD curve to the right.  When this happens, GDP rises and unemployment falls.  If AD falls, the economy typically gets weaker.  This move is shown on a graph by a movement of the AD curve to the left.  This cases GDP to fall and unemployment to rise.

The same relationships apply to movements in the AS curve.  If AS increases, the economy gets stronger.  If AS decreases, the economy gets weaker. 

Thus, increases in either AS or AD cause a higher GDP with less unemployment while decreases have the opposite effect.

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