1. Describe the short-run effects of each of the following shocks on the aggregate price level and on aggregate output.
The government sharply increases the minimum wage, raising the wages of many workers.
An increase in the minimum wage raises the nominal wage and, as a result, shifts the short-run aggregate supply curve to the left. As a result of this negative supply shock, the aggregate price level rises and aggregate output falls.
Solar energy firms launch a major program of investment spending.
Increased investment spending shifts the aggregate demand curve to the right. As a result of this positive demand shock, both the aggregate price level and aggregate output rise.
Congress raises taxes and cuts spending.
An increase in taxes and a reduction in government spending both result in negative demand shocks, shifting the aggregate demand curve to the left. As a result, both the aggregate price level and aggregate output fall.
Severe weather destroys crops around the world.
This is a negative supply shock, shifting the short-run aggregate supply curve to the left. As a result, the aggregate price level rises and aggregate output falls.