The focus of this question is on the German economy in the first half of 2022.

Germany had previously relied on Russia to supply one-third of its total gas demand. However, in June 2022, Russia slashed its gas export to Germany to only 40% of the normal capacity. This was viewed as a retaliation move against the sanctions imposed on Russia for waging the war in Ukraine.

Gas prices soon skyrocketed. The wholesale price topped 200€ per MWh, which is 10 times higher than the historical average.

It should be noted that gas is the chief energy source for manufacturing operations as well as household heating in Germany.

Required:

a) Considering the shock above, point out how Aggregate Demand, Short-run Aggregate Supply, and Long-run Aggregate Supply will be affected.

In the first half of 2022, the German economy will be impacted by the abrupt cut in gas exports from Russia. Here's how it will affect the aggregate demand, short-run aggregate supply, and long-run aggregate supply: Affect on Aggregate Demand: Aggregate demand will decrease in response to the significant rise in gas prices. Consumers' disposable income will be reduced, causing a decrease in consumer spending and shifting the aggregate demand curve to the left.

Firms will cut back on production as a result of the rise in energy costs, leading to lower employment, lower wages, and a further decrease in consumer spending. Affect on Short-Run Aggregate Supply: As a result of the increase in energy prices, short-run aggregate supply will decrease. Energy is an important input in the production process, and higher energy costs would raise firms' cost of production, leading to a leftward shift of the short-run aggregate supply curve. Affect on Long-Run Aggregate Supply: Long-run aggregate supply may be affected by the increase in energy prices in the short run.

Firms may react to the cost increase by investing in new technology and capital that reduces their reliance on energy in the production process. The shift to low carbon and renewable energy would lead to a rightward shift of the long-run aggregate supply curve.Given the situation in the first half of 2022, Aggregate Demand, Short-run Aggregate Supply, and Long-run Aggregate Supply will be affected by the abrupt cut in gas exports from Russia, and this will result in a decrease in Aggregate Demand and Short-run Aggregate Supply and an increase in Long-run Aggregate Supply.

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