Question

Describe the effect of the following events would on the aggregate demand (AD) curve in the U.S. Answer with SR= shifts right, SL=shifts left, MU=move up curve, or MD=move down curve.

(a) A boost in research and development by computer companies produces more powerful and efficient computers and equipment. _

(b) Income falls in several countries that trade heavily with the U.S.

(c) Prices fall in the economy.

(d) After a budget surplus, Congress moves to cut personal income taxes.

Answer 1

Answer : a) For given event the aggregate demand curve "shift to right". Because if company produce more powerful and efficient computers and equipment then the demand increase for these computers and equipment. As a result, the aggregate demand increase and for this reason the aggregate demand curve shift to rightward.

b) For given event the aggregate demand curve "shift to left". Because when income level decrease for those countries who are heavily trading with U.S. then the demand decrease for U.S. goods and services. As a result, the U.S. aggregate demand decrease and for this reason the aggregate demand curve shift to leftward.

c) Here for given event the aggregate demand curve is a "move down curve". Because when price fall then quantity demanded increase. As a result, with falling price the aggregate demand curve is a move down curve.

d) Here for given event the aggregate demand curve "shift to right". Because when income tax decrease then real income increase for people. Due to increasing real income people purchase more goods and services at existing price level. As a result, the aggregate demand increase and for this reason the aggregate demand curve shift to rightward.