Question

Watch the Shifts in Aggregate Demand video (Links to an external site.)Links to an external site. (embedded in the reading) and summarize the factors that cause the AD curve to shift. Did the video help you understand the model? Pick one of the four scenarios listed below the video and explain in your own words which way the AD curve will shift.

At least 200 words

Answer 1

The Aggregate Demand curve shows a negative relationship between price level and level of Real GDP in the economy because of Wealth effect, Interest Rate Effect and Exchange Rate Effect in the economy. The Aggregate Demand Curve can shift because of changes in the autonomous factors in the economy. Some of the factors that causes shift in the aggregate demand curve are as follows:

a. Changes in the level of Consumption Expenditure: As consumption expenditure in the economy increases, the level of aggregate demand increases and the curve shifts rightwards. On the other hand, as the level of consumptiom expenditure decreases, the aggregate demand decreases and the curve shifts leftwards.

b. Changes in Investment Expenditure: As investment expenditure in the economy increases, the level of aggregate demand increases and the curve shifts rightwards. On the other hand, a decrease in investment expenditure reduces aggregate demand and shifts the curve leftwards.

c. Chamges in Government Expenditure: As the level of government expenditure in the economy increases, the level of aggregate demand increases and as the level of government expenditure decreases, the level of aggregate demand decreases in the economy.

d. Changes in Net exports : Net Exports = Value of exports - value of Imports. As the value of Net exports increases, the level of aggregate demand increases and as the value of Net Exports decreases, the level of aggregate demand decreases.

Thus, the above changes lead to shift in the level of aggregate demand in the economy.