Question

State which of the following changes cause a shift in the aggregate demand curve and which ones are a movement along it. Also provide the direction of the change.

A cut in government purchases.

A crash in the U.S. stock market.

A shift to a lower inflation target in the monetary policy rule.

Being thrifty now becoming fashionable.

An increase in the European interest rate.

Answer 1

Answer.)

1.) A cut in government purchases = AD shift leftward

2.) A crash in the U.S. stock market = AD shift leftward

A crash in the U.S. stock market will make people more thrifty and discourage private spending.

3.) A shift to a lower inflation target in the monetary policy rule = AD shift rightward

An inflation-targeting central bank will lower interest rates based on below-target inflation. This helps to increase private spending in the economy.

4.) Being thrifty now becoming fashionable = AD shift leftward

Paradox of thrift make lower overall income level.

5.) An increase in the European interest rate = AD shift rightward

An increase in the foreign interest rate leads to a decrease in the exchange rate—a depreciation. The depreciation, which makes domestic goods more cheaper relative to foreign goods, leads to an increase in net exports, so to an increase in the demand for domestic goods and an increase in output.