Reasons for economic output above capacity
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You observe that output is above full-employment output. Politicians are arguing about the possible reasons. One party claims that this is due to a drop in world oil prices. The other party claims that this is due to an increase in consumer spending. Using aggregate supply-aggregate demand graphs, explain (a) how each of the above reasons could cause an increase in output, and (b) what evidence you could use to determine which one of these had occurred.
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a. A decline in the price of oil would reduce costs to producers. They would be able to produce more goods for the same cost, which would shift the supply curve outward. Consumers would purchase more goods, because their incomes would to further. An increase in consumer spending would ...
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