Initially, short-run aggregate supply is
and aggregate demand is
. Some events change aggregate demand, and later, some other events change aggregate supply.
a. What is the equilibrium after the change in aggregate demand?
b. What is the equilibrium after the change in aggregate supply?
c. Describe two events that could have changed aggregate demand from
to
. d. Describe two events that could have changed aggregate supply from
to
.
Q486
Business Confidence Sinking
Business confidence in the economy has plunged to a near record low, suggesting that a fall in investment in new plants and equipment will follow, the Conference Board of Canada reported yesterday. ... The latest survey, conducted in the first three weeks of October, found that business leaders were much more concerned about the economy and their future financial situations than they had been in the summer survey. Expectations about future profitability also fell. “The ongoing financial and equity market mayhem is having a significant impact on business leaders’ views about near-term economic prospects,” it said, noting the survey found that nearly 70 percent believed that the economy would be in worse shape in six months. Only 12 percent, and probably those that benefit from a weaker loonie, believed conditions would improve, it said, adding that ratio is the “worst” since the final quarter of 1990.
a. Explain and draw a graph to illustrate how declining business confidence can change the short-run equilibrium real GDP and price level.
b. If the economy was operating at full-employment equilibrium, describe the state of equilibrium after the fall in business confidence. In what way might business expectations have a self-fulfilling prophecy?
c. Explain how the economy can adjust in the long run to restore full-employment equilibrium and draw a graph to illustrate this adjustment process.
d. Explain the author’s statement that those businesses who “believed conditions would improve” are “probably those that benefit from a weaker loonie.”