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#5. Other things equal, what effects would each of the following have on aggregate demand or aggregate supply? In each case use a diagram to show the expected effects on the equilibrium price level and the level of real output. Aggregate demand is a schedule or curve that shows the total quantity of goods and services demanded at different price levels. Aggregate supply is a schedule or curve that shows the total quantity of goods and services produced at different price levels.

a. a reduction in the economy’s real interest rate.
AD curve would shift to the right, an increase in aggregate demand.

b. A major increase in the Federal spending for health care (with no increase in taxes). AD curve would shift to the right, an increase in aggregate demand.
c. The complete disintegration of OPEC, causing oil prices to fall by one-half. AS curve would shift to the right, an increase in aggregate supply. Deregulation would reduce per-unit costs and shift the aggregate supply curve to the right.

d. a 10% reduction in personal income tax rates (with no change in government spending). AD curve would shift to the right, an increase in aggregate demand. A reduction in personal income tax rates raises take-home income and increases consumer purchases at each possible price level. Tax cuts shift the aggregate demand curve to the right.

e. A sizeable increase in labor productivity (with no changes in nominal wages). Increases in productivity reduce the per-unit production cost of output. By reducing per-unit production costs, increases in productivity shift the aggregate supply curve to the right.

f. A 12% increase in nominal wages (with no change in productivity). AS curve would shift to the left, a decrease in aggregate supply.
g. A sizable depreciation in the international value of the dollar. When the dollar declines in value against foreign currencies, it takes more dollars to buy foreign goods. So foreign goods become more expensive...
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