Explain the effect of an increase in aggregate demand on the general price level in the...

Explain the effect of an increase in aggregate demand on the general price level in the short run at a given aggregate supply.

Provide any five causes of an increase in aggregate demand.

Solutions

Expert Solution

In the short run, if AD increases, and AS doesn't change:

the price level rises
short run GDP rises

This is shown in the diagram below:

Causes of an increase in aggregate demand:

An increase in consumption expenditure
- due to lower interest rates, consumers may borrow and spend more
- consumers may spend more if they expect a price rise in the future
- festival season consumption
An increase in investment expenditure
- due to lower interest rates, producers may borrow to expand their business
- producers' optimism about the future
An increase in government expenditure
- governments may do this to stimulate the economy
- governments may undertake new projects
An increase in exports
- due to global expansion of trade
- due to certain trade deals
A decrease in imports
- due to self reliance, manufacturing locally
- due to trade policies of other countries

Rahul Sunny answered 1 year ago

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