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Aggregate output

Determine whether each of the following would cause a shift of the aggregate demand curve, a shift of the aggregate supply curve, a shift in neither curve, or a shift in both curves. If a shift is caused, indicate which curve shifts, and in which direction it shifts. What happens to aggregate output and the price level in each case?
The price level changes.
Consumer confidence increases.
The supply of resources decreases.
The wage rate decreases.

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Sample Answer

  • The price level changes. This does not cause a shift in either the aggregate demand curve or the aggregate supply curve. The price level is on the vertical axis of the aggregate demand/aggregate supply graph, so it is a parameter of the model, not a variable that is determined by the model.

Full Answer Section

  • Consumer confidence increases. This causes a shift of the aggregate demand curve to the right. This is because when consumer confidence increases, consumers are more likely to spend money, which increases aggregate demand. This leads to higher aggregate output and a higher price level.
  • The supply of resources decreases. This causes a shift of the aggregate supply curve to the left. This is because when the supply of resources decreases, it becomes more expensive to produce goods and services, which decreases aggregate supply. This leads to lower aggregate output and a higher price level.
  • The wage rate decreases. This causes a shift of the aggregate supply curve to the right. This is because when the wage rate decreases, it becomes less expensive to produce goods and services, which increases aggregate supply. This leads to higher aggregate output and a lower price level.

Here is a table summarizing the effects of each of the factors on aggregate demand, aggregate supply, aggregate output, and the price level:

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