Question

Describe what happens to the Aggregate Demand curve in each of the situations below. The stock market crashes causing everyone's wealth to decrease. The government decides to invest in new fighter jets for the military. Large tariffs are enforced on imports causing imports to decrease severely while exports stay the same. There is a significant increase in interest rates causing many potential home buyers to leave the housing market.

Answer 1

Aggregate Demand Curve- Different Situations
Aggregate demand curve performs accordingly to various factors that affect the income and demand of an economy. Aggregate demand refers to the total amount of demand for all the finished goods and services produced in an economy. The curve shifts accordingly to the change in aggregate demand when it rises and falls.
The stock market crashes causing the income and wealth to fall will obviously have a negative impact on the aggregate demand. Reduced income will reduce the level of demand falling prices leading to further fall in income. Aggregate demand curve shifts to the left showing a fall in the total demand in the economy.
Government investments in military expenses like purchasing jets become unproductive for the economy can cause the level of aggregate demand. A rise in the military spending can reduce the growth of the economy from less demand in the economy of common goods. An unproductive expense in the military equipments or changeless output or employment may keep the aggregate demand curve constant or shift leftward according to the nature of military expenses.
Large tariffs imposed on import can reduce the level of import, increasing demand for domestic goods and services. Increase in price due to increased tariff will reduce the demand for imports increasing the demand and income for domestic goods. This increases domestic income and demand. This will shifts the aggregate demand curve to the right showing an increase in the total demand in the economy.
Increase in interest rates reducing the demand for housing markets reduces the income earned by the market and thus the aggregate demand function. This will shift the demand curve to the left showing fall in the aggregate demand or the total demand.