Question

Explain how each of the following factors would influence aggregate demand in the United States. Be sure to explain which component of aggregate demand would be affected.

Use only the following terms to fill in the blanks (do not include the quotes): "C", "I", "G", "NE", and "increase" or "decrease":

Your answer should look similar to this: NE will increase, causing AD to increase.

a.         a stock market crash:   will  , causing AD to  .

b.         an increase in the personal income tax rate:   will  , causing AD to  .

c.         a decrease in the real interest rate:   and  will  , causing AD to  .

d.         an increase in government purchases:   will  , causing AD to  .

e.         a decline in income in Canada:   will  , causing AD to  .

Answer 1

A. A stock market crash will causing AD to decrease, as investors confidence will hit and they will increase saving and spend less thus investments in the economy will fall.

B. An increase in the personal income tax rate will causing AD to decrease because higher tax rate will reduce disposable income of people thus Consumption will fall in the economy.

C. A decrease in the real interest rate will cause AD to increase, because it will increase borrowing in market and thus consumer spending. Consumption and Investments will increase in the economy.

D. An increase in government purchases will cause AD to increase as it will create positive multiplier effect in demand for economy. The Government Spending will increase the Aggregate Demand in the economy.

E. A decline in income in canada will cause AD to decrease in the US economy as the Net Exports to canada will fall due to less speding by canadian people.