## DragIT - Aggregate demand and supply

The above diagram shows an aggregate demand curve and an aggregate supply curve, with equilibrium real national income (Ye) and the price level (Pe) where the two curves intersect.

First, drag the two lines in turn to show the influence of (a) increased aggregate demand and (b) increased costs on the price level and national income.

Second, click the 'Rotate AS line' button so that the AS curve becomes more elastic and then again drag the two lines in turn and note the effects on Ye and Pe.

Referring to the above diagram, are the following statements true or false? In each case assume that nothing else changes. (Try dragging the lines to check on your answer.)

1

##### Shifts in aggregate supply and demand

An increase in aggregate demand will cause higher inflation.

 a) True b) False Yes, that's correct. The statement is true. Higher aggregate demand will shift the aggregate demand to the right (try dragging this in the above diagram) and cause the equilibrium price level to rise (inflation).No, that's not right. The statement is true. Higher aggregate demand will shift the aggregate demand to the right (try dragging this in the above diagram) and cause the equilibrium price level to rise (inflation).Your answer has been saved.

2

##### Shifts in aggregate supply and demand

An increase in costs will make the aggregate supply curve more inelastic.

 a) True b) False Yes, that's correct. The statement is false. An increase in costs will shift the supply curve to the left, but will not change the elasticity.No, that's not right. The statement is false. An increase in costs will shift the supply curve to the left, but will not change the elasticity.Your answer has been saved.

3

##### Shifts in aggregate supply and demand

The less responsive is AS to a rise in AD, the more prices will rise for a given increase in AD.

 a) True b) False Yes, that's correct. The statement is true. Try rotating the AS curve and then drag the AD curve and see the impact on the equilibrium price level.No, that's not right. The statement is true. Try rotating the AS curve and then drag the AD curve and see the impact on the equilibrium price level.Your answer has been saved.

4

##### Shifts in aggregate supply and demand

An increase in expenditure tax will shift both the aggregate demand and supply curves to the left.

 a) True b) False Yes, that's correct. The statement is true. An increase in expenditure tax will reduce consumption (shifting aggregate demand to the left) and will also represent an increase in costs (shifting aggregate supply to the left as well).No, that's not right. The statement is true. An increase in expenditure tax will reduce consumption (shifting aggregate demand to the left) and will also represent an increase in costs (shifting aggregate supply to the left as well).Your answer has been saved.

5

##### Shifts in aggregate supply and demand

An improvement in productivity will shift both the aggregate demand and supply curves to the right.

 a) True b) False Yes, that's correct. The statement is false. An improvement in productivity will mean that firms are more efficient (shifting aggregate supply to the right), but it will not shift aggregate demand. There will simply be a 'move along' the aggregate demand curve, not a shift.No, that's not right. The statement is false. An improvement in productivity will mean that firms are more efficient (shifting aggregate supply to the right), but it will not shift aggregate demand. There will simply be a 'move along' the aggregate demand curve, not a shift.Your answer has been saved.