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

In summary, the above-average rainfall in the Midwestern United States during spring 2016 negatively impacted the agricultural sector, causing a decrease in production. This led to a leftward shift in the Aggregate Supply curve which resulted in a decrease in Real GDP (output), an increase in the overall price level, and a decrease in employment within the agricultural sector and potentially related industries.

Step-by-step solution

Identify the effect of above-average rainfall on agriculture

Above-average rainfall will likely have a negative impact on agriculture. Too much rain can cause flooding, leading to destruction of crops. This will result in a decrease in agricultural production.

Determine the effect of decreased agricultural production on Aggregate Supply (AS)

A decrease in agricultural production will lead to a decrease in the overall supply of goods and services in the economy. As a result, the Aggregate Supply curve will shift to the left.

Analyze the effect of the shift in the AS curve on output, price level, and employment

When the AS curve shifts to the left, we will see the following effects on output, price level, and employment: 1. Output: The equilibrium level of Real GDP (the output produced by the economy) decreases due to the decrease in agricultural production. 2. Price level: Since there is less supply of goods and services, the overall price level in the economy will increase according to the law of supply and demand. 3. Employment: As the production decreases, fewer workers are needed. This will lead to a decrease in employment in the agricultural sector and potentially in related industries as well.

Summarize the effects of above-average rainfall on output, price level, and employment using the AD/AS diagram

To summarize, above-average rainfall in the Midwestern United States leads to a decrease in agricultural production. As a result, the AS curve shifts to the left. This causes the equilibrium level of Real GDP to decrease, the overall price level to increase, and employment to decrease in the agricultural sector.