Graph Assignment 2- CH33 ADAS

a. The event affects the aggregate demand.

Explanation: An economy’s GDP (Y) is the sum of its consumption (C), investment (I), government purchases (G), and net exports (NX). Each of these four components contribute to the aggregate demand for gods and services. Since Biden’s ‘Buy American’ order increases government purchases, it can be said that the order affects the aggregate demand.

 

 

b. Biden’s order increases government purchases. The aggregate demand, which indicates the quantity of goods and services demanded at every price level, thus also increases. This causes the aggregate-demand curve to shift to the right (AD₁ to AD₂ as seen in the graph below).

 

 

c. In the short-run, the economy goes from point A to point B, moving along the original short-run aggregate-supply curve (AS₁). As a result, the output of the economy rises from Y₁ to Y₂, and the price level rises from P₁ to P₂. (Graph below)

 

 

 

d. Because of the increase in aggregate demand, the price level initially rises from P₁ to P₂. The price level is thus above the level that people were expecting (P₁) before the rise in aggregate demand. People can be surprised in the short run, but over time, their expectations will catch up with this reality. Therefore, the expected price level will rise, causing wages, prices, and perceptions to change. This change will affect the short-run aggregate-supply curve. Since firms will have to pay more costs, the production level at each given level of prices will decrease, which shifts the short-run aggregate-supply curve to the left from AS₁ to AS₂. Because of this shift, the economy will approach point C, where the new aggregate-demand curve (AD₂) crosses the long-run aggregate-supply curve. At point C, the new long-run equilibrium, output is back to its natural level Y₁ while the price level is increased to P₃. (Graph above)