Elias Abboud

ID: 12010365

Question 1:

a)  It has been stated that firms have become more optimistic and has increased their spending on
machinery and equipment. Spending on machinery and equipment is termed as investment
spending. Hence an increase in investment will shift AD curve rightward.

b) The government increase in income tax will leave less disposable income and hence cause
consumption and savings to decrease, shifting the aggregate demand curve to the left.

c) The economy experiences inflation will cause movement along the AD curve. Price will increase
and quantity demanded will decrease causing movement along the demand curve.

d) Faster income growth in other countries will cause Net export of our country to rise resulting in
the rightward shift of our demand curve.

Question 2:

a)An increase in Labor force will cause rightward shift of the SRAS curve as more quantities will now
be produced with more number of labors.

b) Increases in the price of important raw materials cause the SRAS curve to shift to the left, which
means that at each given price level for outputs, a higher price for inputs will discourage production
because it will reduce the possibilities for earning profits.

c) Decrease in the wages causes an increase (rightward shift) of the short-run aggregate supply

curve because more labors will be demanded at that lower wage rate to produce more of the
quantity.

d) A positive supply shock will cause a rightward shift in the SRAS curve. A positive supply shock
could be an advance in technology which makes production more efficient, thus increasing output.
Question 3:

1-AD shifts leftwards as next exports fall because exports become costly for foreigners and imports
become cheap for domestic citizens. Prices level and real GDP will fall.

2-AD will rise since investment rises and hence it shifts rightwards. Price level and real GDP rises.

3-AD shifts leftwards as consumers postpone purchases to buys goods in future when prices are
lower. Price level and real GDP level falls.

4-This will decrease production of oil as people work less in hot temperature. Even demand for oil
in Saudi itself will rise since people use more cooling systems to ward off heat which will reduce
supply for outside world. Thus aggregate supply or SRAS will shift left- wards. Price will rise and real
GDP will fall.

Question 4:

1-Points A and C. Long run equilibrium is given by the intersection between the long run aggregate
supply and the aggregate demand curves. 

2-Points B and F. Short run equilibrium is yielded by the intersection between the short run
aggregate supply curve and the aggregate demand curve.

3-Point C with initial equilibrium at point A, increased investment spending shifts the aggregate
demand curve to the right from AD2 to AD1. In the long run, the new equilibrium will be at point C

4-Point A with the economy initially at point C, a decrease in government spending will lead to a fall
in aggregate demand, which shifts the aggregate demand curve to the left from AD1 to AD2. The
new long run equilibrium will be point A.
Question 5:

A-When the currency exchange rate increases the value of the U.S. dollar rises in term
of the Lebanese Lira causing an inflation where foreign goods will become more
expensive and prices will skyrocket leading the aggregate demand curve will shift to the
right.
An increase in the interest rate in the economy which leads to higher cost of borrowing for both
households and firms. this means that households will consume less end firms will invest less
because of the higher cost of borrowing due to high interest rate. this will shift the aggregate
demand to the left, causing the real GDP to decline as well as the price level.
B- Technological development in the capital for production and this is anticipated to help the
producers in the economy to produce more goods. We can anticipate that there is going to be more
output following the development of technology. This will actually increase the short run aggregate
supply in the economy and shift the SRAS to the right, causing the real GDP to increase and the price
level to decline.
Where emigration of deskilled labor force in the Lebanese economy for better opportunities and pay.
This has reduce the available resources for higher production of goods and services. This will cause
the short run aggregate supply to decrease , leading to the SRAS curve to shift to the left. this will
lead to reduction in the real GDP and the increase in the price level .