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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?