y1 increases to y2
- this shows an increase in real gdp
- total value of goods and services produced in the economy has increased
- firms will increase their demand for workers to meet the extra output which they are aiming to produce
- unemployment will fall
- more people having a job will lead to an improvement in living standards
y1 decreases to y2
- this shows an decrease in real gdp
- total value of goods and services produced in the economy has decreased
- firms will decrease their demand for workers as there is less output that is being produced
- unemployment will increase
- which will lead to a decline in living standards
pl1 increases to pl2
- there is an increase in the average price level
- increase in the rate of inflation
- high inflation (above 2% target) can be damaging
- as wages do not increase as frequently as increases in prices
- disposable incomes will fall if people continue to spend as normal
- living standards will fall
- workers may as for higher wages
- firms can increase wages and then increase prices more
- or offer higher wages and layoff some workers, causing unemployment
pl1 decreases to pl2
- there is a decrease in the average price level
- this would be seen as deflation or disinflation depending on the state of the economy
- deflation can be damaging
- this is bad as
- consumers will delay spending as they expect lower prices in the future
- and also because the value of money is increasing so people hold on to it
- lower consumer spending can lead to further decreases in AD
- leading to further deflation and also unemployment