Question

Questions

1. Explain why decreases in income tax, savings and import spending all increase aggregate demand.

2. How does a change in the interest rate influence the aggregate demand curve?

3. If the value of the Canadian dollar decreases, what is the likely impact on aggregate demand?

4. Why is a shift of the aggregate supply curve to the right like an outward shift of the production possibilities curve?

Answer 1

Decrease in income tax, savings and import spending all leads to rise in aggregate demand. The reason is that income tax, savings and import are withdrawal of marginal propensity to consume. With decrease in income tax, savings and imports, marginal propensity to consume increases. If MPC is higher than multiplier is higher. Multiplier leads to initial investment which further increases in aggregate consumption. Therefore, Decrease in income tax, savings and import spending all leads to rise in aggregate demand.

Impact of change in interest rate on aggregate demand curve. Decrease in interest rate leads toward upward shift in aggregate demand curve. It means that aggregate demand increases at fall in interest rate. The reason is that at low interest rate, people do not tend to save money in bank and keep with themselves in liquidity. And aggregate expenditure increases.

If the value of Canadian Dollar decreases, then aggregate demand will increase. Reason is that with depreciation of Canadian dollar, export will become cheaper and import costlier. Reduction in imports, increase MPC and If MPC is higher than multiplier is higher. Multiplier leads to initial investment which further increase in aggregate consumption.

The reason is that increase in aggregate supply curve represent increase in production and outward shift in production possibility curve also reveals increase in production due to increase in efficiency of resources.