Aggregate Demand

Question

The following chart shows data on aggregate supply, aggregate demand, and the price level for the fictional country of Westobia. 



PRICE LEVEL: 220

AD: 640

AS: 540:

PRICE LEVEL: 230

AD: 630

AS: 580

PRICE LEVEL: 240

AD: 620

AS: 620

PRICE LEVEL: 250

AD: 610

AS: 660

PRICE LEVEL: 260

AD: 600

AS: 680

PRICE LEVEL: 270

AD: 590

AS: 700

PRICE LEVEL: 280

AD: 580

AS: 710

1. On a complete labeled AD/AS graph, plot the AD/AS diagram from the data. Identify the equilibrium, labeling it E.
2. Imagine that, as a result of a government tax cut, aggregate demand becomes higher by 50 at every price level. Plot the new AD on your graph, labeling the new equilibrium E2. 
3. How will the new equilibrium alter output? 
4. How will it alter the price level? 
5. What do you think will happen to employment?

Answer 1

AD shifts outward by 50 after tax cut. See shift in video