The Impact of Energy Costs on the Aggregate Supply essays

The Impact of Energy Costs on the Aggregate Supply essays 1. An increase in aggregate demand, at a level of supply that remains the same, generally gives way to an increase in price. The reason for this is simple, both from a psychological and economic perspective. Indeed, an increase in aggregate demand means that the volume of goods and services being bought by consumers in a certain economy increases. This means that suppliers of goods and services will be tempted to raise prices, because they are sure that there will be a constant demand for their goods and services, even at the higher prices practiced due to the increase in aggregate demand. Additionally, the new equilibrium price that is thus formed will be at a higher level, because the aggregate demand curve has suffered a translation to the right along the aggregate supply curve, thus to a new level of quantity supplied (as previously pointed out in the volume of goods and services provided) and higher price. A higher price will mean inflation, so, we can underline the fact that an increase in aggregate demand will lead to an increase in the price level and a higher inflation due to this. An increase in aggregate supply means that the volume of goods and services provided on the market is higher and, thus, that, at a constant level of customer demand, there are more goods and services sold on the market. Due to an excess in production, the prices will fall, graphically shown in a move to the left of the aggregate supply curve along the aggregate demand curve. This will mark a recession of the economy, because producers will be forced to sell at a lower price than usual, due to an increase of aggregate supply of their products at the same demand level. Selling at lower prices will mean that producers will need to adjust their costs to match the falling prices and reduce their workforce as well. 2. The relationship between government purchases, net taxes, the Marginal Propensity to Consume and the countrys G...