Analysis of the AD/AS Curve: Macroeconomic Changes in the US Economy (Term Paper Sample)

Analysis of the AD/AS Curve
Students Name
Institutional Affiliation
1.
AS
P1
P*
P2 AD1
AD2AD*
Y2 Y* Y1
* Consumers Expects a Recession
When a recession is expected, consumers are more pessimistic about the economy (Blanchard, 2006). Therefore, the level of consumer spending significantly decreases causing the aggregate demand curve to shift leftwards. This lowers the price level from P* to P2.
* Rise in Foreign Income
A rise in the foreign incomes increases aggregate demand in the foreign country. This means that exports increases expanding the size of AD. Therefore, the AD curve shifts towards the right, from AD* to AD1. As a result, the price level increases from P* towards P1.
* Workers Negotiate for Increased Wages
Increased wages means an increased spending since wage earners have a tendency to spend more as their income rises. Aggregate demand increases shifting the AD Curve to the right. As a result, the price level increases from P* to P1 in the short run.
* Depreciation of the Dollar
Depreciation of the Dollar makes foreign goods to be expensive to the US citizens while the US exports becomes cheaper. Increased exports increase the size of the AD, hence shifting the AD curve rightwards. The price level moves upwards towards P1.
* Interest Rate Drops
A drop in interest rates means that consumers can access loans easily. The income level of consumers increases significantly increasing consumption. Aggregate demand increases, hence shifting the AD curve to the right and increasing the price levels towards P1 as shown in the diagram.
* China's Stock Market Crushes Pushing the Chinese Economy into a Recession
A recession in the Chinese economy reduces the Chinese purchasing power. Net trade balance relative to the Chinese economy decreases. The AD curve shifts from AD* to AD2. As a result, the price level decreases as well.
2. The Us Economy During the Recession
LRASSRAS
P
PAD*
AD1
Y1Y* GDP
Many people become unemployed during a recession. A higher unemployment rate means that many people do not have enough income to spend. The level of consumption is significantly reduced.
Initially, the economy was stable at Y*. However, as the level of consumption declined, the aggregate demand curve shifted leftwards from AD* to AD1. This resulted in the contraction of the economy from Y* to Y1. Similarly, the price level