Reference no: EM133530435
Question: Can someone provide me with the aggregate demand and supply graph?
The aggregate demand (AD) and aggregate supply (AS) model can be applied to understand the impact of oil price changes on the Malaysian economy. In this model, aggregate demand represents the total spending on goods and services in the economy, while aggregate supply represents the total production of goods and services.
When oil prices rise in Malaysia, it affects both aggregate demand and aggregate supply in the following ways:
Aggregate Demand (AD): a) Increase in Production Costs: Higher oil prices lead to increased costs of production, particularly for industries that heavily rely on oil, such as transportation and manufacturing. This increase in production costs reduces the purchasing power of households and businesses, leading to a decrease in consumer spending (C) and investment (I). As a result, the aggregate demand curve shifts to the left, reflecting lower overall spending in the economy.
b) Inflationary Pressure: Higher oil prices can contribute to inflationary pressures as production costs rise. This can reduce consumers' purchasing power and negatively impact consumer confidence, leading to lower spending on goods and services. Consequently, the aggregate demand curve may shift further to the left as businesses experience reduced demand.
Aggregate Supply (AS): a) Increase in Input Costs: Higher oil prices raise the cost of inputs, such as fuel and energy, for businesses across various sectors. This can lead to reduced profitability and lower production levels. As a result, the aggregate supply curve shifts to the left, indicating a decrease in the quantity of goods and services supplied in the economy.
b) Output and Employment Reduction: The decrease in aggregate supply due to higher oil prices can result in reduced output and employment levels in sectors directly or indirectly affected by the oil price increase. This can lead to higher unemployment rates and lower economic growth potential in the short term.
Overall, the impact of oil price changes on the Malaysian economy, as depicted by the AD-AS model, suggests a decrease in both aggregate demand and aggregate supply. This can result in lower economic activity, reduced consumer spending, and potential inflationary pressures. However, the magnitude of the effects will depend on various factors, including the elasticity of demand and supply, the degree of oil dependency in the economy, and the effectiveness of government policies in mitigating the impact of oil price fluctuations.