Shift in AS or AD- homework- Government announces a large increase in spending on health and education.

inflation AS AS1

P P1

AD y y1 real national income

The government has increased spending on health and education, which shifts the AS downwards to the right, AS1. There is a shift in the AS curve because the spending is making health better, more range of different health services supplied, and offer greater and more education. The price for health and education is lower so people can to pay less for it, and that can attract more people to use health service or take an education without having to pay that much. This will have a positive effect on the people because they have a better health and are more educated, which can also benefit the government as people are healthy and less are sick cause they have great health service offered, and that well educated people can supply their knowledge or skills learned through education.

Chancellor announces tax exemption scheme on new investments for small to medium sized businesses.

Price

AS

P1

P

AD1

AD y y1 real national income

The tax exemption scheme gives small and medium sized firms an opportunity to invest more money on things that can benefit the firms, and help them to expand or develop more. Therefore the AD curve shifts upwards to the left, AD1, because the tax exemption increases the demand for investments to be made by the firms or businesses. The shift on AD raises the investments from I-I1, and the price from P-P1 as the firms have to take money or use money so they can invest in order to earn or gain profit. The tax exemption announced by the chancellor can benefit small or medium sized firms as they have more money to invest and spend, but it also benefits the chancellor as they can contribute to increase businesses that they can gain from later.

- New regulations on national insurance and pension schemes will increase red tape surrounding employment claims the Confederation of British Industry (CBI).

Price AS

P

AD1 AD y1 y

According to the claim made by the CBI, the new regulations on national insurance and pension schemes will increase red tape surrounding employment. Insurance and pension for most people are necessity because people would like to know that they have secured their belongings, themselves and the future in case something happens. The claims made by the CBI can shift the AD downwards to the left, AD1. The decrease in AD can be caused by that the employer is more skeptical or may not like the new regulations on insurance or pension. This will decrease the jobs available to from q-q1, and the wages will stay the same because there are people that still have jobs, but with new regulations on pension and insurance. The shift on AD can make it harder for people that want to get a job, but it can also benefit the employees as they get more rights and better work conditions.

Average wage rises way above inflation for the third month running.

Inflation AS

high

stabile

AD1

AD y y1 Real national income

The rise in average wage above inflation will increase consumer spending as they have more money to spend as they earn more. Therefore the AD shifts upwards to the right to AD1. The increase in aggregate demand shows that there is an economic growth as people have more money and are able to consume more, but the increase in wages will also increase inflation. The high inflation can lead to shortage of goods as the consumers are worried about price rise in the future and start hoarding goods. What can also happen is a decrease in the real value of money, and investments and saving may be discouraged due to the uncertainty of inflation in future.

- Exchange rate appreciation knocks export hopes for manufacturing.

AS1 ASPrice

P1

P

AD Real national output

The manufactures of exports if affected by the exchange rate, which is limiting the firms to earn more by not letting them export their products. This will then cause a

shift on the AS curve, up to the left from AS-AS1. The reason for the AS shift is that the firms wouldn’t produce more as they are not able to export the product and gain profit from it. Then instead of producing a large amount, the firms then produces less which can cause the price to rise from p-p1 as a less amount is being supplied.

- Share prices tumble, wiping 20% off company values.

AS1

Price AS

P1

P

AD

RNO RNO1 Real national output

20% of company values have been cut down due to unstable share prices. Since the shares are unpredictable, the company would try to cut down the costs as there has been a value loss. The cut in cost decreases the AS and shifts the curve from AS-AS1, and the decrease in AS can raise the price from p-p1 as less is being supplied or produced. The cut in cost can also affect the employees as their wages can be lower or the jobs available in the company can be reduced.

- Institute of Directors (IOD) latest survey shows clear signs of optimism for the future of the economy.

Inflation AS

Rise

Stabile

AD1

AD Stabile Rise real national income

The survey that showed optimism for the future of the economy can be a result of a rise in aggregate demand. The optimism can be explained by the fact that there has been a rise in inflation. Consumers are earning more as the wages have increased, and

because the income is higher consumers will purchase more. This shifts the AD curve upwards to the right to AD1. The increase in AD can be a sign of economic growth.

- UK productivity levels at their highest level for 10 years.

ASPrice AS1

P1

p

AD1

AD y y1 y2 The production level in UK is at the highest level for 10 years most likely due to an increase in inflation. The high inflation that has raised the production shifts the AD up to the right from AD-AD1. The increase of AD is because of the income raise as the consumers can spend more. As the consumers earn more, their demand for things increases and in order for making sure of that it won’t be a shortage of supply, the production of things also increase. The firm has an opportunity to gain profit as the demand for things raises. The increase shifts the AS up to the left to AS1, the new amount of supply decreases the price from p1-p as there is more supply. The firms that gains profit by raising their level of production can employ new employees in order to become more efficient or to expand their business. In this case it’s possible to say that the economy is growing.

- Government 'stealth taxes' increase tax burden to highest level for 50 years.

AS1 AS Inflation

P2

p p1

AD1 AD Y1 y real national income/ouput

The tax is so high that the consumers are not able to spend much money on things, and that shifts the AD curve down to the left from AD-AD1. The shift in AD means that the demand is lowered and because the demand is reduced, the price drops from p-p1

as the firms have to lower their price in order to make consumers buy. The firms aren’t gaining any profits as the tax that has been imposed is so high, and the fact that it costs too much for the firms to produce now. The cut in cost can be made in order to find solutions to adapt to the tax, and that can be done by cutting of employees or decrease the production. The cost cut shifts the AS up to the left to AS1. There is less supply as the production is reduced, so the price will rise from p1-p2 which will be expensive for the consumers. There isn’t an economic growth as there is a tax burden that limits the growth.

- Expansion in numbers of students attending higher education exceeds government targets.

AS

P1

p

AD1

AD Y y1 The government didn’t know that it would be so many students that took a higher education, so the spending on education wasn’t as expected. This causes a rise in AD-AD1 as the students demand more education. The demand is higher than the supply which raises the price from p-p1. It is more expensive to study and the government has to spend more on education offers for students in order to out fill their demand.

Bank of England signals rise in interest rates of ½%.

ASInterest rate

p ½% rise P1 p1

AD1 AD Y1 y Real national income

Most people have either loans on their house, car or cottage, and the greater the loan is the more affected are them if there is a small raise on the interest rate. The ½% rise in interest rate cause the AD to shift down to the left from AD-AD1. The reason for the decrease in AD is because people have less money to consume for as they are paying up their credit loan, house loan or other loans. The income is what is limiting their consumption. The drop on the AD curve moves the price from p-p1 as it have to cost less since the interest rate is decreasing the AD, so in order to make thing affordable the price is decreased. People that have savings can earn from a rise in interest rate, and benefit from that.

- No rate rise in UK but US and EU central banks increase interest rates.

ASInterest rate

p P1

AD1 AD Y1 y Real national income

- Changes in interest rates made by the US and EU can affect the AD. The effects that occur is capital investment. When interest rates rise, the increased cost of borrowing tends to reduce capital investment and, as a result, total AD decreases. That explains

the shift on the AD curve down to the left from AD-AD1. The shift on AD can have a greater effect on consumer spending, because most people borrow money to buy things like houses and cars, and a higher interest rate increases the total cost of the purchase, and therefore can reduce the total amount of such borrowing and spending. Consumer spending is the largest component of aggregate demand in the United States, so fluctuations can have a large effect on the overall economy.

Radical reform of welfare spending should help government cut spending as a proportion of GDP.

AS

p p1

AD1 AD

Y1 y The cut on spending that the government has made shifts the AD downwards to the left from AD-AD1. The reason for the shift is that consumers will consume less since the government has cut their spending and not contributing to welfare as before. The government spending decreases from p- p1. The cut in welfare can be caused by that the government sees other areas that needs to be strengthened.

Stability of inflation cheers business leaders.

AS

P1

p

AD1

AD y y1

The inflation is stabile and that makes the business leaders feel secure about taking a chance on investing money. The money invested shifts the AD upwards to the right from AD-AD1, which can be a sign of economic growth. The investment made can contribute to create work place or raise the wages of the employees as the business leaders sees an opportunity to expand or produce more. Since the inflation is stabile as the real/nominal interest rate will be lower, encouraging investment in productivity growth. People and firms do not react so much to small fluctuations in prices, they do not demand higher prices (and wages) knowing that inflation will be controlled in the long-term.

- Britain leads the way in nano-technology development - this could be very, very big claims government minister!

Price AS

AS1

p p1

AD

Y y1 real national output

Britain leads the way in the progress of developing nano-technology, which can make them to become the supplier of nano-technology. That can shift the AS down to the right from AS-AS1, because Britain will be able to supply more as the technology is further developed and looked into. Britain also has to invest a lot and expand the labor supply and encourage people to work, but that will benefit the government because if the nano-technology is successful then the production cost would hopefully be lower in long term.