The Effects of Different Economic Scenarios on the AD-AS Model
What are the short-run and long-run effects of various economic scenarios on the AD-AS model?
How do changes in government policies or external factors impact output, price level, and unemployment rates in the short run and long run?
Scenario 1: Government Expands Investment Tax Credit
The government's decision to expand the investment tax credit leads to the rightward shift of the AD curve in the AD-AS model. This results in higher output, a higher price level, and lower unemployment in the short run. In the long run, both the AD and SRAS curves shift to the right, leading to higher output, a higher price level, and no change in the unemployment rate.
Scenario 2: Canada Suffers from an Economic Recession
When Canada experiences an economic recession, the AD curve shifts to the left. This causes lower output, a lower price level, and higher unemployment in the short run. In the long run, the SRAS curve shifts to the right, resulting in a lower price level, no change in output, and a lower unemployment rate.
Scenario 3: Sudden Decrease in Oil Price
A sudden decrease in oil price leads to the rightward shift of the AS curve. This causes higher output, a lower price level, and lower unemployment in the short run. In the long run, the AD curve shifts to the right, leading to higher output, a lower price level, and no change in the unemployment rate.
Scenario 4: Concerns about Social Security System
When people worry about the social security system going bankrupt and increase their saving, the AD curve shifts to the left. This results in lower output, a lower price level, and higher unemployment in the short run. In the long run, the SRAS curve shifts to the right, causing a lower price level, no change in output, and a lower unemployment rate.
Understanding the AD-AS Model and Economic Scenarios
The AD-AS model helps us analyze the effects of changes in economic scenarios on output, price levels, and unemployment rates in both the short run and long run. Various factors such as government policies, external shocks, and consumer behavior can lead to shifts in the AD and AS curves, resulting in different outcomes for the economy.
In the short run, changes in the AD curve lead to immediate impacts on output, price levels, and unemployment rates. However, in the long run, the economy adjusts and reaches a new equilibrium, where the SRAS curve also shifts to accommodate the changes.
By understanding how different scenarios affect the AD-AS model, policymakers and analysts can make better decisions to manage economic fluctuations and promote stability. It is essential to consider both short-run and long-run effects to develop effective strategies for economic growth and stability.