For each of the following, explain whether it shifts the short-run aggregate supply curve, the long-run aggregate supply curve, or the aggregate demand curve (or more than one of these). a....

For each of the following, explain whether it shifts the short-run aggregate supply curve, the long-run aggregate supply curve, or the aggregate demand curve (or more than one of these).

a. Households decide to save a smaller share of their disposable income.

b. There is an 8-week strike in the steel industry

c. A drought in the Midwest causes poor wheat harvest.

d. The labor force participation rate increases.

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pohnpei397 | College Teacher | (Level 3) Distinguished Educator

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Let us look at each of these examples:

a. Households decide to save a smaller share of their disposable income.

In this case, there will be a change in aggregate demand.  More specifically, aggregate demand will increase.  This will happen because there will be more money being used to buy goods and services.  When households get money, they can either save it or spend it.  When they save less, they are necessarily going to spend more.  When they spend more, aggregate demand increases.

b. There is an 8-week strike in the steel industry

In this case, the short-run aggregate supply curve will change.  Aggregate supply will decrease in the short run but should not be affected in the long run.  A strike in the steel industry will, of course, mean that less steel is being produced in the short term.  This will reduce the aggregate supply for the economy as a whole.  However, it will not change the basic potential of the economy.  Once the strike ends (which will be in the short run) the economy will go back to normal and aggregate supply will be unaffected in the long term.

c. A drought in the Midwest causes poor wheat harvest.

The answer here is the same as the answer to the previous example.  The reasoning is the same.  The poor wheat harvest means there is a reduced supply of wheat this year.  However, a one-year drought does not reduce the capacity of the economy in the long term.  Therefore, only the short-run aggregate supply curve is affected.

d. The labor force participation rate increases.

Here, we have an increase in both the long-run and short-run aggregate supply curves.  When more people participate in the work force, more goods are produced and aggregate supply increases in the short run.  However, an increase in this participation rate also means that there will be more people working in the long term.  This will increase the economy’s long-term ability to supply goods and services.

Sources:

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