AS Economics: Aggregate Demand and Aggregate Supply Theory
How will the aggregate demand in the UK economy be affected by the following events? In each
case, assume ceteris paribus (i.e. other factors held constant)
Economic Event
Likely impact on
aggregate demand
(rise / fall )
1
The government decides to decrease the basic
percentage rate of income tax from 20% to 18%
2
There is a sustained fall in the real value of UK
property prices
3
The government announces a temporary twoyear reduction in the standard rate of value
added tax (VAT) from 20% to 15%
4
There is a sustained increase in the value of the
pound against the US dollar on the foreign
exchange market
5
Over a period of a year, the annual rate of
inflation falls from 45 to 2% whilst money wages
rise by 4% over the same time period
6
The interest rate paid on credit cards, bank
loans and overdrafts falls by an average of 2%
7
A South Korean company announces that it will
build a factory in the UK to supply both the UK
market and the market in the rest of Europe
8
UK households reduce their consumption of
imported goods as they pay back some of their
debts
9
There is an increase in interest rates when the
exchange rate is rising
Evaluation Points
What else might happen as
a result of this event which
might offset / reverse the
change mentioned?
Aggregate Supply
Short run aggregate supply is a relationship between quantity of real GDP supplied and the price
level when we hold constant the level of wages and the prices of other factors of production
A change in costs in the economy will cause a shift in the short run aggregate supply curve
How will the aggregate supply curve be affected by the following events?
In each case, assume ceteris paribus (i.e. other factors held constant)
Economic Event
Impact on the economy’s
aggregate supply curve
(SRAS)
Choose one of the
following
Outward shift / inward shift
1
The government announces a 10% rise in the
value of the national minimum wage
2
There is a fall in the global price of oil from
$100 a barrel to $80 a barrel
3
There is a 5% decrease in average wage rates
4
The price of carbon credits in the EU emissions
trading scheme rises from Euro 12 to Euro 20
per tonne of carbon
6
The six major energy suppliers in the UK
announce a 15% rise in the retail price of gas
and electricity for UK businesses
7
A fall in the cost of semi conductor chips used
in the computer industry and other related
industries
8
The EU agrees a reduction in import tariffs for
imports coming from Brazil, India and China
9
The value of the pound against the Euro falls
by 15% over a period of 12 months
10
There is a significant rise in net inward
migration of skilled workers from Eastern
European countries
Evaluation Points
What else might happen
as a result of this event
which might offset /
reverse the change
mentioned?