Aggregate Demand: Draw me an AD graph, start at the equilibrium of Price Level 5 and...

Aggregate Demand: Draw me an AD graph, start at the equilibrium of Price Level 5 and RGDP at 100.Show me what happens when people feel that the economy is “safer” and the spend more. Assume the shift changes Price Level by 2 and RGDP by 20. What effect from class is this and explain the shift.

Expert Solution

When people feel that the economy is safer, they will spend more. As a result of which the aggregate demand curve shifts to the right or upwards, which means people are consuming or demanding more goods as their purchasing power has increased. This will shift the equilibrium quantity and price in the economy. The economy initially was at output level 100 and price level 5, which changes to output level 120 and price 7 due to wealth effect. That is, as the income of the poorer sections of the society rise, their marginal propensity to consume will also rise which will in turn increase the aggregate demand of goods and services and thus shift the curve to the right.

Rahul Sunny answered 2 years ago

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