Question

It is important to know the difference between shifts in the AD curve (right or left) and movements along this curve. Which of the following will move one down the AD curve (that is, moving down vertically)? There might be more than one.

1.interest rates fall and firms increase investment
2.firms produce more due to a higher price for produced goods

3.firms produce less due to a higher prices for produced goods

4.firms cut production due to a higher price of oil (which is turned into gasoline for cars, kerosene for airplanes, and diesel for trucks)

5.firms increase production due to a lower price of oil (which is turned into gasoline for cars, kerosene for airplanes, and diesel for trucks)

6.prices fall and total spending rises

7.prices rise and total spending falls

8. For the same P, there is more total spending. Thus, the AD curve shifts right.

Answer 1

1. The aggregate demand curve will shift. The aggregate demand curve consists of the components “consumption”, “investment”, “government spending” and “net exports”. Any change in these components without a change in the price level will cause the aggregate demand curve to shift. In this case, the aggregate demand curve will shift because this change in the investment is induced irrespective of any change in the price level. This will thus cause the aggregate demand curve to shift to the right.
2. The aggregate demand curve will not shift. The aggregate demand curve consists of the components “consumption”, “investment”, “government spending” and “net exports”. Any change in these components without a change in the price level will cause the aggregate demand curve to shift. In this case, the aggregate demand curve will not shift because there is direct change in the price level which will only cause movement along the same AD curve. In this case, the aggregate supply curve will shift.
3. The aggregate demand curve will not shift. The aggregate demand curve consists of the components “consumption”, “investment”, “government spending” and “net exports”. Any change in these components without a change in the price level will cause the aggregate demand curve to shift. In this case, the aggregate demand curve will not shift because there is direct change in the price level which will only cause movement along the same AD curve. In this case, the aggregate supply curve will shift.
4. The aggregate demand curve will not shift. The aggregate demand curve consists of the components “consumption”, “investment”, “government spending” and “net exports”. Any change in these components without a change in the price level will cause the aggregate demand curve to shift. In this case, there is a supply shock. This will first cause the aggregate supply curve to shift to the left. Once that shifts, it is imperative that there will be movement along the AD curve where because of the reduction in supply, the price level will rise and people will consume less.
5. The aggregate demand curve will not shift. The aggregate demand curve consists of the components “consumption”, “investment”, “government spending” and “net exports”. Any change in these components without a change in the price level will cause the aggregate demand curve to shift. In this case, there is a positive supply shock. This will first cause the aggregate supply curve to shift to the right. Once that shifts, it is imperative that there will be movement along the AD curve where because of the increase in supply, the price level will fall and people will consume more.
6. The aggregate demand curve will not shift. The aggregate demand curve consists of the components “consumption”, “investment”, “government spending” and “net exports”. Any change in these components without a change in the price level will cause the aggregate demand curve to shift. In this case, there is change in the price level. Thus, the movement will again be along the same AD curve.
7. The aggregate demand curve will not shift. The aggregate demand curve consists of the components “consumption”, “investment”, “government spending” and “net exports”. Any change in these components without a change in the price level will cause the aggregate demand curve to shift. In this case, there is change in the price level. Thus, the movement will again be along the same AD curve.
8. The aggregate demand curve will shift. The aggregate demand curve consists of the components “consumption”, “investment”, “government spending” and “net exports”. Any change in these components without a change in the price level will cause the aggregate demand curve to shift. In this case, the aggregate demand curve will shift because this change in the government spending is induced irrespective of any change in the price level. This will thus cause the aggregate demand curve to shift to the right.