Aggregate Demand or Aggregate Supply Shocks and Policy Correction
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Thinking of an incident that has impacted our economy, try to see if it affected aggregate demand or aggregate supply. Which of these curves shifted? How can this be corrected through Fiscal Policy, if needed?
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Solution Summary
This solution selects shocks to the economy due to aggregate demand and aggregate supply components and describes what happens to each component on a macroscale.
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You can tackle this question by assuming that the economy is in a stable condition or equilibrium. In this situation, the aggregate demand (AD) and aggregate supply (AS) crossing each other at the equilibrium price level (P) and equilibrium aggregate income (Y). Any incident that influencing the position of either AS or AD is sometime called shock. This shock will influence the movement either AS or AD to the left or to the right depending on what is that particular shock.
Whether AS or AD will shift from their original situation depending on what variable behaves abnormally causing the shock. Anything influencing the component of AD will cause AD to shift to the left or right depending on the shock, either negative or positive. As you should know, the component of AD are consumption (C), investment (I), ...
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