Question

In: Economics

Just want to know if I understand this. Still confused on government consumption wealth increases ad...

Just want to know if I understand this. Still confused on government

consumption

wealth increases ad shifts right
future expected income increases ad shifts right
future expected prices (permnant) shift right

intrest rate up ad shifts left
debt up ad shifts left
expected future prices up (continus) ad shifts left

disposable income causes movement on the ad curve ( still need further info on this)

investments

business confidence up shift ad right
out put up shifts ad to right

interest rate up shifts ad to left
price of inputs up shift ad to left

net exports

exchange rate up ad shifts right
forign income increases ad shifts to right
forign prices up ad shifts to right
import tariffs increase ad shifts to right

export tariffs increase ad shifts to left
domestic dollar up ad shifts left

Solutions

Expert Solution

Aggregate demand is the demand of goods and services by people in an economy over a period of time.

Aggregate demand (AD) curve shifts to left of right when factors other than price changes. The factors are consumer’s consumption, income, wealth, future expectations about prices, investments, government spending and net exports etc.

AD = consumption expenditure + investments + government expenditure + net exports (export - import)

  • Consumption: consumption increases AD shifts right. when consumer increases their consumption level it leads to increase in the aggregate demand in the economy and the AD curve shifts to right

Wealth increases AD shifts right: the increase in wealth leads to increase in the money with people which increases their purchasing power and their demand for goods and services increase it shifts the AD curve to right.

Future expected income increases AD shifts right because people increase their demand for goods and services

Future expected prices up AD shift right: when people expect that the prices will go up in the future they tend to increase their current demand for goods and services which shifts the current AD curve to right. if people expect that price will go down in the future they decrease their current demand which shifts the curve to left.

Interest rate up AD shifts left: because consumers take less loans from the banks due to increased interest rates which decreases the money supply and the demand decreases which leads to leftward shift of the AD curve.

Disposable income causes movement on the AD curve: disposable income causes movement on the consumption curve because consumption is a function of disposable income but the change in disposable income will shift the AD curve as increase in disposable income increases consumption of the people and increase in consumption will shift the demand curve to right.      

  • Investment: increase in investment leads to increase in the aggregate demand in the economy which shifts the AD curve to right and decrease in investment will shift the AD curve to left.

Business confidence up shift ad right: as firms will invest more on their businesses due to high confidence it will increase the aggregate demand in the economy.

Out put up shifts ad to right: when total output in the economy increases it leads to increase in the aggregate demand.

interest rate up shifts ad to left: as increase in interest rates leads to decrease in the demand for credits by the businesses from the banks which reduces the investment.

Price of inputs up shift ad to left: as the demand for inputs will decrease.

  • Government spending : government spending increases AD shifts right. when government spending increases the money supply also increases in the economy it leads to rise in the money with people and fall in prices due to which the aggregate demand (AD) increases in the economy and curve shifts to right. government affects the aggregate demand change through the changes in tax policy and fiscal policy.

Tax policy: the change in taxes also affects the Ad curve as increase in tax rates reduces the money with people and their consumption level decreases which shifts the AD curve to left and decrease in taxes leads to increase in income which increase consumption and AD curve shifts to right.

Fiscal policy: the expansionary fiscal policy increases money supply in the economy which increases aggregate demand and shift the curve to right while contractionary fiscal policy reduces the money supply in the economy which further decreases aggregate demand and shifts the curve to left.           

  • Net exports: if net exports increase the AD curve will shift to right and if net exports will decrease AD curve will shift to left.

Exchange rate up ad shifts right: as the value of currency will increase with the high exchange rate.

Foreign income increases ad shifts to right: because the inflow of

money in the country will increase the money supply in the economy which will increase aggregate demand.

Foreign prices up ad shifts to right: as the imports will decrease due to high foreign prices and people will demand domestic goods.

Import tariffs increase ad shifts to right: as increase in import tariffs will increase the prices of imported products so people will decrease demand for the foreign products and will increase demand for domestic products.

Export tariffs increase ad shifts to left: as price of exported goods will increase so producers will prefer to export their goods and services which will decrease supply in the domestic market and prices will increase so people will decrease demand.
Domestic dollar up ad shifts left: as exports will increase due to increase in the value of currency as compare to foreign currency.


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