Question

1. Analyse the difference between a movement along the AD curve versus a shift of the AD curve? +/-250 words

Answer 1

The aggregate demand (AD) curve is a downward sloping curve, reflecting an inverse relationship between aggregate price level (P) and real GDP (or output) (Y).

There will be a movement along AD curve only if there is a change in aggregate price level. If price level rises, quantity of real GDP demanded will fall, showing an upward movement along the AD curve. If price level falls, quantity of real GDP demanded will rise, showing a downward movement along the AD curve.

On the other hand, if any other non-price determinants of aggregate demand change, keeping aggregate price level unchanged, there will be a shift in AD curve and not a movement. For example,

(a) If consumption demand rises (falls) from a fall (rise) in tax rates, aggregate demand will rise (fall) and AD curve will shift right (left).

(b) If interest rates in the economy falls (rises), business investment demand as well as the portion of consumption demand that is financed by borrowing, will rise (falls), leading to an increase (decrease) in AD, shifting the AD curve toward right (left).

(c) If government spending on goods and services rises (falls), aggregate demand rises (falls) and AD curve will shift to right (left).

(d) If exports rise (fall), net exports rise (fall), so aggregate demand rises (falls), shifting AD curve to right (left). Similarly, a fall (rise) in imports will increase (decrease) net exports, shifting AD right (left). Net exports may rise (fall) if, for example, domestic currency depreciates (appreciates) with respect to foreign currency, and/or foreign country grows at a higher (lower) rate that domestic country.