andy7845
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- as/ad diagrams?
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isthistaken
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I don't know what level you're at, but this looks like you'd need to draw an IS-LM diagram contracting.

Rising prices indicates inflation, so we might expect the central bank to increase interest rates in order to try and reduce the amount of money flowing in the economy. This would reduce household spending and investment, as the opportunity cost of doing each has increased. This shifts LM upwards and is a movement along the IS curve.

Low consumer confidence will reduce household spending as they don't feel as comfortable in their financial positions. In theory increased saving should lead to further investment, but this probably wouldn't happen as consumption has fallen and firms may not want to take the risk of investing when confidence is low. This shifts the IS curve inwards.

It's been a while since I did any macro but I think this is broadly right.
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andy7845
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(Original post by isthistaken)
I don't know what level you're at, but this looks like you'd need to draw an IS-LM diagram contracting.

Rising prices indicates inflation, so we might expect the central bank to increase interest rates in order to try and reduce the amount of money flowing in the economy. This would reduce household spending and investment, as the opportunity cost of doing each has increased. This shifts LM upwards and is a movement along the IS curve.

Low consumer confidence will reduce household spending as they don't feel as comfortable in their financial positions. In theory increased saving should lead to further investment, but this probably wouldn't happen as consumption has fallen and firms may not want to take the risk of investing when confidence is low. This shifts the IS curve inwards.

It's been a while since I did any macro but I think this is broadly right.
Thank you, really appreciate it! Im currently doing A-Level economics and the question is from the topic of AD, SRAS, LRAS and Macro Equilibrium. Do you know which graph I'd have to draw if it were to relate to the topic of what I'm studying? As I haven't studied IS-LM diagrams yet...
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isthistaken
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(Original post by andy7845)
Thank you, really appreciate it! Im currently doing A-Level economics and the question is from the topic of AD, SRAS, LRAS and Macro Equilibrium. Do you know which graph I'd have to draw if it were to relate to the topic of what I'm studying? As I haven't studied IS-LM diagrams yet...
Hmm it's been a while since I did A Level, but aggregate demand is made up of Consumption + Investment + Government spending +(exports - imports). So AD would shift inwards because consumption and investment have fallen due to the higher interest rates and lower consumer spending. This would result in a movement along the SRAS curve in the short run and due to low confidence could result in a fall in LRAS. You could draw an AD/AS diagram and show the shifts and movements. There is a new equilibrium where AD=AS.
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andy7845
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(Original post by isthistaken)
Hmm it's been a while since I did A Level, but aggregate demand is made up of Consumption + Investment + Government spending +(exports - imports). So AD would shift inwards because consumption and investment have fallen due to the higher interest rates and lower consumer spending. This would result in a movement along the SRAS curve in the short run and due to low confidence could result in a fall in LRAS. You could draw an AD/AS diagram and show the shifts and movements. There is a new equilibrium where AD=AS.
wow - thank you so much! I really appreciate this
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