Question

Determine whether each of the following events causes a shift of a curve or a movement along a curve in the short run. Indicate which curve is involved and the direction of the change.

A. As a result of an increase in the value of the dollar relative to other currencies, American producers pay less in dollar terms for foreign steel, a major commodity used in production.
B) An increase in the money supply by the Federal Reserve increases the quantity of money that people wish to lend, lowering interest rates.
C) Greater union activity leads to higher nominal wages.
D) A fall in the aggregate price level increases the purchasing power of households' and firms' money holdings. As a result, they borrow less and lend more.

Answer 1

A. The Supply Curve shifts Right.

As American Producers are paying less in dollar terms, their costs of production will reduce. The reduction in Cost of Production will spur producers to produce even more because inputs are cheaper and more will be bought and processed and so the Supply will increase and shift the Supply Curve left.

B. Aggregate Demand Curve shifts Right.

As a result of more money being in the Economy, more people will want to lend out the excess cash they have to earn some interest on it. This will reduce the cost of borrowing and will therefore spur people to borrow more to be able to afford things they want. With the people having more money, they will buy more things therefore upping Demand. The Demand Curve will shift to the Right as a result.

C. Supply Curve shifts Left

Wages are an input into Production. Should they increase that would mean that the cost of Production has risen as well for Producers. They will respond by reducing the amount of goods they produce so as to maintain Profitability and reduce those costs. This will cut supply and shift the Supply Curve to the left.

D. Movement along Short Run Aggregate Demand Curve

Aggregate Demand Curve is constructed based on the demand of the Economy at different prices levels. Should the Price Level decrease it is simply a movement along the Aggregate Demand Curve.