Which other factors would shift the U.S. aggregate demand curve

Expert Solution

Aggregate demand curve represents the relationship between aggregate output and price level. There is negative relationship between the two which results in a downward sloping curve. The total demand for goods & services in an economy constitutes aggregate demand. The aggregate demand curve can shift towards right or left (outward or inward shift). When there is increase in aggregate demand then the curve will shift towards right (outward shift) & when there is decrease in aggregate demand then the curve will shift towards left (inward shift). There are various factors which can shift the U.S. aggregate demand curve such as:

a) When the federal reserve increases or decreases the interest rates: An increase in interest rates will shift the aggregate demand curve towards right & a decrease in interest rates will shift the aggregate demand curve towards left.

b) Increase or decrease in government spending: An increase in government spending will shift the aggregate demand curve towards right & a decrease in government spending will shift the aggregate demand curve towards left.

c) Increase or decrease in taxes: When the government will reduce the taxes then the aggregate demand curve will shift towards right & when the government will increase the taxes then the aggregate demand curve will shift towards left.

d) Expectations of households & firms: When the households & firms have good expectations regarding the future growth then the aggregate demand curve will shift towards right but when the households & firms have bad expectations regarding the future growth then the aggregate demand curve will shift towards left.

e) Demand shocks: Demand shocks can take place due to natural disasters or diseases as they can limit the earnings of the people as a result of which they will be able to buy less goods. This will lead to decrease in aggregate demand & will shift the aggregate demand curve towards left.

f) Change in Net Exports (Exports-Imports): When exports are more than imports then this will lead to a rightward shift in the aggregate demand curve. Exports increases when the dollar becomes weaker in comparison to other currencies because this will make U.S goods relatively cheaper in other countries leading to increase in their demand. But when dollar becomes stronger, U.S. goods will become expensive in other countries & will be less demanded which will result in lesser exports. So, net exports will decline which will lead to a leftward shift in the aggregate demand curve.

Rahul Sunny answered 2 years ago

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