MACROECONOMICS AGRREGATE SUPPLY AND AGGREGATE DEMAND

Question

What would happen to the equilibrium price level and quantity if there is a 40% decrease in aggregate supply accompanied by a 40% increase in aggregate demand

Answer 1

Very germane question to what the world experienced post covid. Supply took a nosedive due to many factors and demand increased due to pent up spending and lots of money sloshing around in the system.

What happened? Inflation. The price went up at every quantity demanded. Unless using a very simple model, its difficult to say exactly how much the equilibrium point changed, but we can say for certain that if the demand curve moves to the right and the supply curve moves to the left the equilibrium price will be higher for that same quantity.

ie: Simple model:

EQ baseline is $10 and 100 units, if demand expands 40% and supply contracts 40% our new equilibrium might be $14 and 100 units.

Think of your graph: Dermand is 'curve' down and to the right, Supply is 'curve' up and to the right. I say 'curve' because in Econ working with simple models we usually like to express curves in straight lines. If we move the demand curve to the right by the same amount we move the supply to the left, our EQ quantity (X axis) will remain the same but the price {Y axis) will be higher.