Question

During spring 2016 the Midwestern United States, which has a large agricultural base, experiences above- average rainfall. Using the AD/AS diagram, what is the effect on output, the price level, and employment?

Short answer

The economy has approached its potential GDP level, as shown by the LRAS curve. As a result, employment and production growth will increase.

Step-by-step solution

 Aggregate demand : 

The entire quantity of products and services sought by customers at a particular price level and period is known as aggregate demand.

Impact on output level and price level due to heavy rainfall :

The agricultural foundation in the Midwest of the United States is substantial. It received a lot of rain in the spring of 2014. Heavy rains led in a rise in agricultural production as productivity. Farmers had not expected the increased produce. As a result, the economy benefits from the supply shock, which causes the AS curve to move to the right.

In the above diagram, AS curve shifted rightward from S to S1 in the above diagram, resulting in a decrease in price from P to P1 and an increase in quantity from Q to Q1.