Question

Given the catastrophic flood disaster in Pakistan as of August 2022, leading to the loss of properties, assets, and wealth, along with the destruction of agricultural crops and manufacturing facilities, what would be the impact of this disaster on the economy of Pakistan according to the AD-AS model?

Options:
a) The AD curve remains the same.
b) The SRAS curve shifts left.
c) The AD curve shifts left.
d) The SRAS curve remains the same.
e) People in Pakistan are desperately in need of vital supplies (e.g., food, medicine, etc.), thus, demand increases, and the AD curve shifts right.
f) The SRAS curve shifts left.
g) None of the above (i.e., all of the above answers are incorrect).

Answer 1

The Pakistan flood disaster would likely cause both the SRAS curve to shift left due to reduced productive capacity and possibly the AD curve to shift left due to the loss of wealth, leading to a lower GDP and higher price levels.

Step-by-step explanation:

The catastrophic flood disaster in Pakistan as of August 2022 would lead to a leftward shift in the Short-Run Aggregate Supply (SRAS) curve according to the AD-AS model. This occurs as the destruction of properties, assets, agricultural crops, and manufacturing facilities has a direct impact on the nation's productive capacity, reducing the economy's ability to produce goods and services at any given price level. Consequently, the SRAS curve shifting to the left results in a lower equilibrium Gross Domestic Product (GDP) and a higher price level, illustrating a situation known as stagflation, where the economy faces both a recession and inflation.

In contrast, the Aggregate Demand (AD) curve might also experience a shift. Given the increased need for vital supplies like food and medicine, one might argue for a rightward shift in the AD curve due to a spike in consumption. However, considering the widespread loss of wealth and assets, the overall effect on aggregate demand is likely to be negative. Therefore, the AD might actually shift to the left, indicating reduced consumption and investment as people and businesses recover from their losses, further contributing to a decrease in GDP.