Expansionary and contractionary shifts are two possible changes in the aggregate demand and aggregate supply model. If the Central Bank lifts interest rates, the money supply would be decreased that indicates a contractionary shift of the model. Increase in international oil prices produces increase of local prices that provokes the same scenario. Appreciation in the foreign exchange rate denotes the country's currency depreciation that would create an expansionary shift of the model. If there is an increase in private domestic investment spending, it stimulates the economy, increases wealth level of population and produces an expansionary shift of the model. Fall of real estate prices produces the same effect on wealth level and results in the same consequences. If main exports fall in price while the goods the country imports from abroad rise in price, it would eventually provoke increase of net exports and an expansionary shift of the model.
Graph 1. A contractionary shift in the aggregate demand and aggregate supply model.
Graph 2. An expansionary shift in the aggregate demand and aggregate supply model.
Contractionary and expansionary shifts of the model are presented in graphs above that allows to trace the short- run and long- run effects of the described events. 'A', 'B' and 'C' denote intersections.
The article under consideration is devoted to a competitive ranking of an Australian economy. The article states that “Australia’s macroeconomic situation is satisfactory in the current context...Despite repeated budget deficits, its public debt amounts to a low 23 per cent of GDP, the third lowest ratio among the advanced economies, behind only Estonia and Luxembourg” (A staff reporter, 2012, p.1). The article refers to the principles of general evaluation of the country's macroeconomic situation. However, despite the optimistic financial data, the article stresses that Australian economy is far from its perfect condition and is still characterized by decrease of indicators of the nation's competitiveness.
One of the primary concerns associated with the Australian economy is the country's labor market. It is known that “Australia's unemployment level in April came in at 4.9 per cent, according to the Australian Bureau of Statistics” that is surprising taking into account “firms' uncertainty, difficult domestic conditions, and job shedding in a lot of sectors” (LM Investment Management LTD, 2012, p.1). Hence, there is no wonder that a lot of experts perceive the official information with certain skepticism.
If there is a sustained rise in private investment spending, there would be observed certain important implications. According to the simple Keynesian model, the equilibrium income would rise with sustained rise in investment spending. Simple Keynesian model is Y= C+I+G where consumption C = a+ mpc*(Y -T). This formula proves rise of equilibrium income as a result of a sustained increase in private investment spending.
Inflation is defined as a rise in the general level of prices of goods and services over a particular period of time. Deflation is the opposite process indicating decrease of the general prices of goods and services. …