Aggregate Supply (AS) represents quantity of output produced/sold by firms, e.g., real GDP. The short run AS curve illustrates the positive relationship between the quantity of output and price level. Based on our previous class, where we studied demand-side GDP determination, AD represents the amount of total spending (consumption, investment, government spending, and net exports) on domestic goods and services. The inverse relationship between total spending and price level is demonstrated by the AD curve. The horizontal axis has real GDP and vertical axis has the price level in the economy. The AS curve shifts due to factors such as productivity growth, and changes in input prices. Similarly, the AD curve shifts when factors including consumption spending, investment spending, government spending, spending on exports minus imports, and consumer/business confidence change. When one or more of these AD-side factors increase, the AD curves shifts to the right.

Please show the effect of each of the cases described below by drawing the shifts in the AS or AD curves, and by showing the new equilibrium point for each case separately.

1. Which curve shifts and to what direction?
2. How does the price and quantity of output (GDP) change at the new equilibrium?

• Case 1:Suppose that productivity increases.
• Case 2:Suppose that government spending increases.
• Case 3:Suppose that income taxes were increased.