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Segment B (from macroeconomics 1 booklet)

Instructions: Please listen to the voice note explaining AD and AS movements, thereafter complete
the group activity for AD and AS shifts. Your group activity is due on Wednesday, 16 th November, and
we will not meet till then. I will try my best to respond to your queries via whatsapp. Good luck.

AD and AS: Shifts and Movements

Aggregate Demand: Movements (Please listen to the VN explaining this)

Price level AD point

Why?

1. Wealth effect (Pigou effect):

If lower prices increase my real wealth, does that mean I am able to spend more, ie C increases? I am
moving my AD curve?

Did this happen in Japan in the 1990’s though?

2. Interest rate effect (Keynes’s effect):

If lower prices increase my real wealth, does that mean I don’t need to borrow much money? Does
that put downward pressure on interest rates (money market)?

Keynesians believe interest rates affect expenditures more than they affect savings.

I am moving my AD curve.

3. International trade effect (Mundell-Fleming’s effect):

If the price of a good is cheaper in Bangladesh than Korea (international market – no external
changes in currency), will more people want to buy Bengali products? I am moving my
AD curve.

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Instructions for group activity (below)

Each person in your group has a specific role: 1 person will be writing a response, and 2 people will
be presenting the same learning. If you have 4 people in your group, the 4 th person is free to join
either the presentation OR written response. For the written response, the response has to
EXPLICITLY identify the criteria as you write in brackets or colour coding, ie, (T) (D) (X) (A) and (E).

Group A: Chloe, Liya, Dominic

Question: Explain how aggregate demand in an economy might be affected by a rise in the exchange
rate and a decrease in the income of major trading partners (10) (Paper 1)

Group B: Philile, Michelle, Kiara

Question: Explain how aggregate demand is likely to be affected by an increase in the wealth of
consumers and an increase in business confidence (10) (Paper 1)

Group C: Simba, Mvuselelo, Lenient, Shafi

Question: Explain how aggregate demand is likely to be affected by an increase in the wealth of
consumers and an increase in government spending (10) (Paper 1)

Group D: Happiness, Stanislas, Innocent, Nsiki

Question: Explain how aggregate supply is likely to be a affected by at least four factors, and which
of these results in the shift in the LRAS as well (10) (Paper 1)

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Aggregate Demand: Shifts

AD Shifts [due to external changes in C or I or G or (X-M)]

Why? (Notes for group research)

1. C can change due to an increase in consumer confidence, wealth (increase in property value
etc), disposable income (eg lower taxes), household indebtedness and expectations of price
levels (postponing and preponing expenditures) and artificially changing interest rates (to
change expenditures).

Research on real-life examples on

(a) Artificially lowering interest rates that increased C (and also increased I)

(b) Any one of the above elements that lowered C

Briefly explain them, and how it changed the AD curve with a diagram. Wrt
(a), what is such a policy called? Wrt (a), how
does this affect the money market? Wrt (a), what is the
targeted inflation rate in the country that you are discussing?

Therefore, an alternate group of economists, called (also neo-classicals) believe in

to solely keep inflation at its’ targeted rate.

2. I can change due to changes in business confidence, improvements in technology (which

stimulate investments), corporate indebtedness and legal/institutional environment (eg ease
of setting up business, administrative fees, etc)

Research on real-life examples on

(c) Artificially lowering corporate tax rates that increased I

(d) Improvements in technology that increased I

Briefly explain them, and how it changed the AD curve with a diagram.

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Wrt (d), do improvements in technology increase the productive capacity of resources? If yes, should
SRAS shift to the right too? Wrt (d), how does
this affect the LRAS curve? What kind of growth does this lead to?

3. G can change due to changes in political priorities (current expenditure* vs capital

expenditure* vs transfer payments*) and economic priorities

Research on a real-life example on

(e) Changing capital expenditure that increased G (whilst also lowering tax rates to increase
C)

Briefly explain this, and how it changed the AD curve with a diagram. What is such
a policy called?

Food for thought: Can this also increase my LRAS? If yes, how?

4. (X-M) can change due to changes in national income abroad, changes in exchange rates and
changes in the level of protection.

Research on real-life examples on

(f) Naturally falling exchange rates that increased X

(g) Higher trade barriers (particularly tariffs) that lowered M

Briefly explain them, and how it changed the AD curve with a diagram.

Wrt (f), when the foreign currency market is running freely and its’ value falls, what do we call that
phenomena? Wrt (f),
when the foreign currency market is running freely and its’ value rises, what do we call that
phenomena?

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Aggregate Supply

Price level AS point

AS shifts (fill in the blanks):

1. Fall in minimum wages ( cost of production) = AS shifts to the

________; AD ________________________________.

2. Fall in other costs (eg raw materials) = AS shifts to the ___________ .

3. Fall in __________ taxes (not corporation or income taxes) = AS shifts to the right

4. Subsidies = AS shifts to the _________________ .

5. Supply shocks = AS shifts to the ________________, eg oil crisis 1970’s.

6. Productive capacity boosts, eg better infrastructure, better human capital through training
or skills, better capital equipment/new skills, etc (quality enhancement) = AS shifts to the

(what about LRAS?)

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