In the AS-AD model presented in lecturesX: a decrease in the price of variable inputs will shift the Short-Run Aggregate Supply (SAS) curve to the left; andY: a collapse of business confidence will shift the Aggregate Demand (AD) curve to the right.
Question
In the AS-AD model presented in lecturesX: a decrease in the price of variable inputs will shift the Short-Run Aggregate Supply (SAS) curve to the left; andY: a collapse of business confidence will shift the Aggregate Demand (AD) curve to the right.
Solution
The statements X and Y in the question are actually incorrect according to the AS-AD model.
X: A decrease in the price of variable inputs would actually shift the Short-Run Aggregate Supply (SAS) curve to the right, not the left. This is because when the cost of production decreases (due to cheaper inputs), firms can produce more at each price level, increasing the overall supply.
Y: A collapse of business confidence would likely shift the Aggregate Demand (AD) curve to the left, not the right. This is because when business confidence is low, firms are less likely to invest in capital or hire new workers, and consumers may also decrease their spending due to fears of a potential economic downturn. Both of these factors decrease the overall demand.
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