The aggregate supply–aggregate demand framework can be used to understand the impact of the financial crisis that hit the U.S. economy in 2007–2009. a) As part of the financial crisis, banks tightened lending standards for consumers, making it harder to borrow to buy a car or home. Did that cause the aggregate demand curve to shift to the left or right? b) Assuming everything else stays constant, does the shift in the aggregate demand curve cause the equilibrium output to rise or fall? Does it cause the equilibrium price level to rise or fall? c) Another effect of the financial crisis was that many businesses found it harder to borrow money to buy new equipment or pay for raw materials, so their production slowed. Did that cause the aggregate supply curve to shift to the left or right? d) Assuming everything else stays constant, does the shift in the aggregate supply curve cause the equilibrium output to rise or fall? e) Based on your answers to (a) through (d), did the financial crisis raise the equilibrium price level, lower the equilibrium price level, or have an ambiguous effect?
