Question

due to inflationary pressures, the national income of households has been spread across a higher overall price base for goods and services. how will this affect be shown in an ad/asad/as model?

Answer 1

Inflationary pressures in the AD/AS model can be demonstrated through a rightward shift in the Aggregate Demand curve or a leftward shift in the Short-Run Aggregate Supply curve leading to a higher price level and potentially ongoing inflation if such shifts are continual or expected.

Step-by-step explanation:

Inflationary Pressures in the AD/AS Model

When inflationary pressures occur due to households experiencing a decreased purchasing power across a broad range of goods and services, this is represented in the Aggregate Demand/Aggregate Supply (AD/AS) model in two key ways:

1. A shift in Aggregate Demand (AD): An increase in aggregate demand, depicted as a shift of the AD curve to the right (from AD to AD₁), indicates that households are willing to spend more even at a higher price level. This shift could lead to a higher price level (from Po to P₁) and contribute to inflation, especially if it occurs when the economy is at or near potential GDP.
2. A shift in Aggregate Supply (AS): A decrease in aggregate supply, represented by a leftward shift of the Short-Run Aggregate Supply (SRAS) curve (from SRAS to SRAS₁), signifies that producers are supplying fewer goods at every price level. This leads to a higher equilibrium price level (from Po to P₁) and can also trigger inflation, particularly if the economy cannot increase production due to factors like full employment.

Continuous shifts in AD to the right or negative shifts in AS could lead to sustained or ongoing inflation, especially if these changes are expected by businesses and households, influencing their behavior towards higher wages, prices, and interest rates accordingly.

Importance of the Aggregate Demand/Aggregate Supply Model

The AD/AS model is critical for understanding the underlying causes of inflation and the macroeconomic impacts of changes in aggregate demand and supply. It demonstrates how various economic factors and government policies can influence the overall price level and economic output (Real GDP).

Answer 2

The way that this affect be shown in an AD/ASAD/AS model is optionb) A downward-sloping AD curve.

What is the inflationary pressures?

inflationary pressures lead to a decrease in the purchasing power of money. This means that for the same amount of money, households can purchase fewer goods and services. As a result, aggregate demand (AD) will decrease.

So, In the AD/AS model, a downward sloping AD curve represents this relationship. As the price level increases, aggregate demand decreases.As the price level (P) rises, aggregate demand (AD) falls. This reflects the decrease in purchasing power due to inflation.

See text below

Due to inflationary pressures, the national income of households has been spread across a higher overall price base for goods and services. How will this affect be shown in an AD/ASAD/AS model?

a) nearly vertical AS slope at the far right

b) a downward sloping AD curve

c) a downward sloping AS curve

d) nearly horizontal AD curve at the far left