In each of the following cases, in the short run, determine whether the events cause a shift of a curve or a movement along a curve. Determine which curve is involved and the direction of the change. a. As a result of an increase in the value of the dollar in relation to other currencies, American producers now pay less in dollar terms for foreign steel, a major commodity used in production. b. An increase in the quantity of money by the Federal Reserve increases the quantity of money that people wish to lend, lowering interest rates. c. Greater union activity leads to higher nominal wages. d. A fall in the aggregate price level increases the purchasing power of households' and firms" money holdings. As a result, they borrow less and lend more.

Step by step solution

01

Identify the curve involved

The foreign steel's reduced cost for American producers will mainly affect the firms' production costs, thus involving the short-run aggregate supply (SRAS) curve.

02

Determine if it's a shift or movement along the curve

When the cost of production changes, it affects the entire SRAS curve, causing a shift rather than a movement along the curve.

03

Determine the direction of the change

The SRAS curve will shift to the right as the decrease in production costs allows firms to produce more goods at each price level. #b. Increase in quantity of money lowers interest rates#

04

Identify the curve involved

The change in interest rates due to an increase in the quantity of money will affect the money market, specifically the money supply (MS) curve.

05

Determine if it's a shift or movement along the curve

The increase in the quantity of money affects the MS curve, causing it to shift rather than resulting in a movement along the curve.

06

Determine the direction of the change

The MS curve will shift to the right, indicating an increase in money supply at each interest rate. This causes interest rates to decrease. #c. Greater union activity leads to higher nominal wages#

07

Identify the curve involved

Greater union activity leading to higher nominal wages will affect the production costs of firms, involving the short-run aggregate supply (SRAS) curve.

08

Determine if it's a shift or movement along the curve

An increase in nominal wages will affect the entire SRAS curve by raising production costs, causing a shift rather than a movement along the curve.

09

Determine the direction of the change

The SRAS curve will shift to the left, as higher wages lead to higher production costs, which result in lower output at each price level. #d. Fall in aggregate price level increases purchasing power and lending#

10

Identify the curve involved

A fall in the aggregate price level affects the purchasing power of households and firms, involving the investment (I) and consumption (C) curves.

11

Determine if it's a shift or movement along the curve

Since the purchasing power change affects the propensity to save and invest for all households and firms, it causes a shift in both the investment (I) and consumption (C) curves, rather than a movement along the curves.

12

Determine the direction of the change

The I and C curves will shift upwards (or to the right), showing that an increase in purchasing power leads to a higher propensity to consume and invest at each interest rate, hence more lending.

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