Question

discuss how an increase (or decrease) in consumer spending (the largest portion of US GDP) shifts the aggregate demand curve, thereby increasing (or decreasing) equilibrium price level and equilibrium real GDP.

Answer 1

Aggregate demand is the total amount of good and services that people in a country are purchasing and consuming in a country over a period of time.

Aggregate demand = C + I + G + NX

C = Consumer spending

I = Investment spending

G = Government expenditure

NX = Net exports

Any change in any of these factors will Change the aggregate demand. Consumer spending is the most important factor in Aggregate demand as out of all these variables Consumer spending will be 50% of AD.

So any change in aggregate demand will shift the aggregate demand curve to move left or right.

If the consumer spending increase it will shift the aggregate demand curve to right and a decline in consumer spending will shift the curve to left.

When consumer spending increases which means people are consuming more when people are consuming more than the production increase. If production in the country increase than Employment rate increase. So all these factors will help the GDP in the country to grow and the economy of the country to boom.

So when country is booming the aggregate price level in the country incrase as the inflation also goes up. Hence both equillibrium price level and real GDP increase.