Your Task You will be given a list of different scenarios that will have an effect on either aggregate demand or aggregate supply. You should use a diagram to explain what the impact would be and also write a short explanation of the impact. In this explanation, you should try to make some judgements about the relative size of the impact of the changes. The reason for doing this is that industry expect you to be able to evaluate and this means making judgements. Look out for some of the key words in the scenario you are given. Scenario: A significant increase in world oil prices Answer: An increase in world oil prices is likely to impact on aggregate supply. This is because oil is an important commodity used in virtually every industry and also domestically. Given the wide- ranging impact, it is likely to lead to an increase in input prices and thus raise costs. The AS curve will therefore shift to the left. This will lead to a rise in inflation from 2.0% to 3.0%. This rise is relatively large and can be explained by the fact that we are told that there is a 'significant' rise in oil prices. As AS shifts to the left, the capacity of the economy falls and we would expect real national income to fall to Y2 and the economy would experience lower economic growth. This, in turn, would suggest that unemployment is likely to rise. If oil prices rise significantly, this increase in unemployment could be relatively large as so much of industry depends on oil for a variety of uses. Inflation AS1 ,AS 3.0% 2.0% + 1 I Y2 Y1 AD Real National Income
Your Turn Using the example above, try to analyse the impact of the following scenarios. Remember - the scenarios could relate to either or both of AS and AD. It is often easier, initially, to analyse the effect on just one area - just make it clear why you have chosen to use AS or AD. In some cases, the scenario could affect more than one variable. Think carefully about how you would analyse such cases - it is good practice for building a coherent and logical argument. · Government announces a large increase in spending on health and education. . Government announces tax exemption scheme on new investments for small to medium sized businesses. . Average wage rises way above inflation for the third month running. · Exchange rate appreciation knocks export hopes for manufacturing. · Share prices tumble, wiping 20% off company values. . Latest survey shows clear signs of optimism for the future of the economy. · Canada productivity levels at their highest level for 10 years. . Government 'GST taxes' increase tax burden to highest level for 50 years. · Expansion in numbers of students attending higher education exceeds government targets. · Bank of Canada signals rise in interest rates of 1/2%. . No rate rise in Canada but US and EU