6.04 The Effects of Monetary and Fiscal Policy in the Macro Economy

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AS-AD Model Practice

Based on the given scenario, determine which way the AS or AD curve shifts, which determinant caused the shift, and what happens to Quantity, Price Level, and Employment.

1. Scenario: Household income throughout the economy decreases.
   1. The Aggregate Demand curve shifts to the left because of Income. Quantity, Price Level, and Employment all decrease.
   2. The Aggregate Demand curve shifts to the right because of Income. Quantity, Price Level, and Employment all increase.
      

   Answer: a. The Aggregate Demand curve shifts to the left because of Income. Quantity, Price Level, and Employment all decrease.

2. Scenario: Businesses see an increase in wages and raw material costs.
   1. The Aggregate Supply curve shifts to the left because of Cost of Inputs. Quantity decreases, Price Level increases, and Employment decreases.
   2. The Aggregate Demand curve shifts to the left because of Cost of Inputs. Quantity decreases, Price Level increases, and Employment decreases.

   Answer: a. The Aggregate Supply curve shifts to the left because of Cost of Inputs. Quantity decreases, Price Level increases, and Employment decreases.

3. Scenario: In an effort to jump-start the economy, the federal government reduces the corporate tax rate.
   1. The Aggregate Supply curve shifts to the left because of Interest Rates. Quantity decreases, Price Level increases, and Employment decreases.
   2. The Aggregate Supply curve shifts to the right because of Business Taxes. Quantity increases, Price Level decreases, and Employment increases.

   Answer: b. The Aggregate Supply curve shifts to the right because of Business Taxes. Quantity increases, Price Level decreases, and Employment increases.

4.  Scenario: Households increase their savings, so the interest rate falls.
   1. The Aggregate Demand curve shifts to the right because of Interest Rates. Quantity, Price Level, and Employment all decrease.
   2. The Aggregate Demand curve shifts to the right because of Interest Rates. Quantity, Price Level, and Employment all increase.

   Answer: b. The Aggregate Demand curve shifts to the right because of Interest Rates. Quantity, Price Level, and Employment all increase.

5. Scenario: Voice control software is adopted by businesses.
   1. The Aggregate Supply curve shifts to the right because of Technology. Quantity increases, Price Level decreases, and Employment increases.
   2. The Aggregate Supply curve shifts to the left because of Technology. Quantity increases, Price Level decreases, and Employment increases.

   Answer: a. The Aggregate Supply curve shifts to the right because of Technology. Quantity increases, Price Level decreases, and Employment increases.

6.  Scenario: A chemical used to increase yields of crops is banned after it is discovered the chemical causes cancer.
   1. The Aggregate Supply curve shifts to the right because of Technology. Quantity decreases, Price Level increases, and Employment decreases.
   2. The Aggregate Supply curve shifts to the left because of Technology. Quantity decreases, Price Level increases, and Employment decreases.

   Answer: b. The Aggregate Supply curve shifts to the left because of Technology. Quantity decreases, Price Level increases, and Employment decreases.

7. Scenario: The government increases the subsidies to all transportation-oriented businesses.
   1. The Aggregate Demand curve shifts to the right because of Government Subsidies. Quantity increases, Price Level decreases, and Employment increases.
   2. The Aggregate Demand curve shifts to the right because of Government Subsidies. Quantity decreases, Price Level increases, and Employment decreases.

   Answer: a. The Aggregate Demand curve shifts to the right because of Government Subsidies. Quantity increases, Price Level decreases, and Employment increases.

8. Scenario: The government increases spending on the nation's infrastructure and starts a massive road building program.
   1. The Aggregate Demand curve shifts to the right because of Government Spending. Quantity, Price Level, and Employment all increase.
   2. The Aggregate Demand curve shifts to the left because of Government Spending. Quantity, Price Level, and Employment all decrease.

   Answer: a. The Aggregate Demand curve shifts to the right because of Government Spending. Quantity, Price Level, and Employment all increase.

9. Scenario: A new fad begins and Americans begin buying clothing from African countries.
   1. The Aggregate Demand curve shifts to the right because of Net Exports. Quantity, Price Level, and Employment all decrease.
   2.  The Aggregate Demand curve shifts to the left because of Net Exports. Quantity, Price Level, and Employment all decrease.

   Answer: b.  The Aggregate Demand curve shifts to the left because of Net Exports. Quantity, Price Level, and Employment all decrease.

10. Scenario: Consumer confidence soars as Americans expect a good economic outlook.
    1. The Aggregate Demand curve shifts to the right because of Consumer Expectations. Quantity, Price Level, and Employment all decrease.
    2. The Aggregate Demand curve shifts to the right because of Consumer Expectations. Quantity, Price Level, and Employment all increase.

    Answer: b. The Aggregate Demand curve shifts to the right because of Consumer Expectations. Quantity, Price Level, and Employment all increase.

11. Scenario: In an effort to reduce pollution, regulations on businesses that operate near rivers are increased.
    1. The Aggregate Supply curve shifts to the left because of Regulations. Quantity decreases, Price Level increases, and Employment decreases.
    2. The Aggregate Supply curve shifts to the left because of Regulations. Quantity increases, Price Level decreases, and Employment increases.

    Answer: a. The Aggregate Supply curve shifts to the left because of Regulations. Quantity decreases, Price Level increases, and Employment decreases.

12. Scenario: In an effort to increase economic activity, the president institutes tax decreases for most consumers.
    1. The Aggregate Demand curve shifts to the right because of Consumer Taxes. Quantity, Price Level, and Employment all increase.
    2. The Aggregate Demand curve shifts to the left because of Consumer Taxes. Quantity, Price Level, and Employment all increase.

    Answer: a. The Aggregate Demand curve shifts to the right because of Consumer Taxes. Quantity, Price Level, and Employment all increase.

13. Scenario: To slow down the economy, the Federal Reserve increases the discount rate.
    1. The Aggregate Demand curve shifts to the left because of Interest Rates. Quantity, Price Level, and Employment all increase.
    2. The Aggregate Demand curve shifts to the left because of Interest Rates. Quantity, Price Level, and Employment all decrease.

    Answer: b. The Aggregate Demand curve shifts to the left because of Interest Rates. Quantity, Price Level, and Employment all decrease.