AD/AS Query

Fall 2009 Final TFU 12:

If income in the UK increases, this would cause the AS curve in the US to shift to the right.

See Chapter on AS/AD Framework. Example 3 “A Positive AD Shock”.

False or Uncertain. With a economic boom in Europe, suppose this leads to an increase in demand for US goods (those richer Europeans buy more US goods). This is an increase in a-bar in the AD & IS curves, and graphically appears as an outward shift (a rightward shift) in the AD curve, leading to a booming US economy.  

How does the AS curve respond? That’s a great question, I’m glad you asked. Recall the AS curve:

The booming US economy increases Y-tilde, reflecting an upward (inward, to the left) shift in the AS curve.

But I guess, if the European boom is temporary, when it subsides and the AD shifts back and then we’ll get a rightward shift in the AS curve. Really, any temporary shock to the AD implies both rightward and leftward shifts in the AS & AD curves (recall the counter-clockwise cycle of the AS/AD diagram) – the exact sequence will depend on the nature of the shock.