ADAS Analysis and Diagrams Worksheet

10. Illustrate how the equilibrium level of national income and equilibrium general price level change
given the following:

a) Consumers expect a recession

If the consumer expects a recession then they will not spend as much money today so as to
"save for a rainy day". Thus, given the same income level, as saving increases, consumption
expenditure falls (increases/ falls).

As consumption expenditure falls (increases/falls), AD decreases increase/decrease). A decrease

(increase/decrease) in AD is shown as a shift to the left (left/right) of the AD curve.

Producers will notice inventories increase (increase/ fall) and respond by decreasing (increasing/
decreasing) their output. Producers will also decrease (increase/ decrease) employment of
labour and other FOPs.

The economy will tend towards a new equilibrium level of national income Y1 and general price
level P1. National income has fell (increased/fell) and general price level has ________________
increased/fell by a multiplier effect.

Illustrate your diagram below

b) Foreign income rises

If foreign income rises, then we would expect that foreigners would spend more money - both in
their home country and in ours. Thus we should see a ___________________(increase/
decrease) in foreign spending on our exports i.e. export revenue _____________________
(increase/fall), which leads to a _______________ (increase/decrease) in aggregate demand This
is shown with a shift to the AD to the _____________ (right/left).

Producers will then ______________ (increase/decrease) their output by __________

(increasing/decreasing) production.

Producers will also __________________ (increase/decrease) employment of labour and other

FOPs.

The real national income (Y0 to YF) and the general price level (P0 to P1) will
__________(increase/fall) by a multiplier effect

Illustrate your diagram below

ADAS Analysis and Diagrams Worksheet

c) Foreign price levels fall

If foreign price levels fall, then foreign goods become cheaper. We should expect that consumers
in our country to buy ______________ (more/less) foreign goods i.e. import expenditure
_____________________ (increases/ decreases).

This will lead to a _______________________ (increase/fall) in Aggregate Demand, which is

shown as a shift to the ______________________ (left/right).

Producers will notice inventories ______________________ (increasing/decreasing) and

respond by __________________ (increasing/decreasing) their output

Producers will also ___________________ (increase/ decrease) employment of labour and other
FOPs.

This leads to a _______________________ (increase/ decrease) in general price levels as well as

a __________________ (increase/decrease) in real national income by a multiplier effect

 Note: For countries that produces goods with high import content or import a lot, the above
will affect AS as well. (to be discussed in later topics)

Illustrate your diagram below

ADAS Analysis and Diagrams Worksheet

d) Workers expect high future inflation and ask for higher wages now

When firms pay out higher wages, unit cost of production ___________________
(increases/decreases).

This leads to a _______________________ (increase/decrease) in aggregate supply, which is

shown as a shift to the_____________________ (right/left) from AS0 to AS1.

This led to a ___________________(increase/ decrease) in the equilibrium real NY from Y0 to Y1

and is a _________________________ (increase/fall) in the general price level from P0 to P1.

Illustrate your diagram below

e) Technology improvements increase productivity

Rise in firm’s productivity value of output produced per unit input increases Assume input prices is
constant unit COP ____________________ (increase/fall)  ___________________ (increase/fall)
in SRAS. [downward shift in SRAS]

This will lead to a ________________________( increase/fall) in real NY (Y0 to Y1) and a

_____________________________ (increase/fall) in GPL from P0 to P1

Illustrate your diagram below

OR

Rise in firm’s productivity value of output produced per unit input increases Assume quantity of
inputs constant productive capacity increases ____________________ (increase/fall) in LRAS.
[rightward shift in LRAS]

• This will lead to a ________________________(increase/fall) in real NY (Y0 to Y1) and a

_____________________________ (increase/fall) in GPL from P0 to P1
ADAS Analysis and Diagrams Worksheet
• There is also a __________________ (increase/fall) in full employment output

Illustrate your diagram below