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What are some factors which would cause a shift in either aggregate supply or...

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yemawe52 | (Level 2) Honors

Posted June 8, 2013 at 6:02 AM via web

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What are some factors which would cause a shift in either aggregate supply or aggregate demand?   

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pohnpei397 | College Teacher | (Level 3) Distinguished Educator

Posted June 8, 2013 at 12:50 PM (Answer #1)

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There are a number of factors that can have an impact on aggregate supply (AS) and aggregate demand (AD).

In terms of AD, one of the major factors that can have an impact is the wealth effect.  What this means is that households will spend more if they come to be wealthier.  Increases in wages can have this effect, but so can things like increases in the values of stocks that they hold or in the value of their homes.  These things make them feel wealthier and thus cause them to consume more.  Another factor that can cause AD to shift is the real interest rate.  If real interest rates drop, it will be easier for businesses to borrow money to invest.  This will cause AD to rise.

Shifts in AS can be short term or long term.  One thing that can cause AS to shift in both the short and the long term is a change in the level of technology.  If a country comes to be more technologically advanced, its producers will be able to make more goods and services.  This increases AS.  Something that can change AS in the short run is a supply shock.  This would be something like a really bad hurricane or flooding that makes it harder to produce in the short term.

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