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Homework answers / question archive / In each of the following cases, in the short run, determine whether the events cause a shift of a curve or a movement along a curve
In each of the following cases, in the short run, determine whether the events cause a shift of a curve or a movement along a curve. Determine which curve is involved and the direction of the change.
a) As a result of new discoveries of iron ore used to make steel, producers now pay less for steel, a major commodity and used in production.
b) An increase in the money supply by the Federal Reserve increases the quantity of money that people wish to lend, lowering interest rates.
c) Greater union activity leads to higher nominal wages.
d) A fall in the aggregate price level increases the purchasing power of households' and firms' money holdings. As a result, they borrow less and lend more.
A. Since iron ore is a crucial element used to numerous industries, this will cause both the long run and short run aggregate supply curve to shift to the right. When the short run curve shifts out to the right, this represents a short run increase in supply. When the vertical long run aggregate supply curve shifts to the right along the bottom axis on the graph, this represents long run aggregate supply increasing in the long run (longer than two business cycles, usually). When production of something becomes cheaper, this allows suppliers to produce more.
B. The increase in money supply will cause both long run aggregate demand and aggregate supply to shift to the right. On the long run graph, the long run aggregate demand curve shifts out to the right, representing an increase in demand. The vertical long run aggregate supply curve shifts out to the right to show the increase in output and GDP. The increase in money supply will cause interest rates to fall. Supply will become easier because the cost of borrowing becomes cheaper, and since interest rates have fallen, households will hold more cash and this will lead to an increase in aggregate demand.
C. Unions demanding higher wages will cause the long run aggregate supply curve to shift to the left. Along the bottom axis, when the vertical long run aggregate supply curve moves to the left along the axis this shows GDP or output shrinking. Because suppliers will have to spend more investment money to pay the higher wages, they will have less money left over for new investment.
D. If firms and households are holding money, this will cause interest rates to fall to try to stimulate investment. Since this affects the aggregate price level, this will cause a downward movement along the aggregate demand curve. The aggregate demand curve is on a diagonal curve moving up and to the left, and intersecting the long run aggregate supply curve. The curve itself does not shift; however, the price level is lowered so this moves the intersection point down further along the line. Prices usually affect quantity demanded instead of just demand, so this is usually represented as a movement on the curve and not a shift. After some time, the low interest rates will cause the long run aggregate supply curve to shift right.
