Aggregate Demand and Its Curve
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Questions and Answers

Which of the following factors would lead to a leftward shift in the aggregate demand (AD) curve?

  • A decrease in consumer confidence (correct)
  • An increase in government spending
  • A decrease in the price level
  • A decrease in interest rates

    • The aggregate demand curve slopes downward because...

  • as prices rise, the cost of production decreases, leading to increased profitability for businesses.
  • as prices rise, the purchasing power of consumers decreases, leading to decreased demand for goods and services. (correct)
  • as prices rise, the purchasing power of consumers increases, leading to increased demand for goods and services.
  • as prices rise, businesses are encouraged to produce more goods and services, leading to increased supply.

    • Which of these is a component of aggregate demand?

  • Government spending (correct)
  • Inflation
  • Depreciation of capital goods
  • Imports

    • What would be the likely effect of a significant increase in the value of the US dollar relative to other currencies?

    <p>A decrease in net exports, shifting the AD curve to the left. (C)</p> Signup and view all the answers

    What would be the primary effect of a decrease in the real interest rate on the aggregate demand curve?

    <p>A shift to the right due to increased investment spending by businesses. (C)</p> Signup and view all the answers

    Which of the following would NOT cause a shift in the aggregate demand curve?

    <p>A change in the price level (B)</p> Signup and view all the answers

    Suppose the government implements a policy of increased taxes on businesses. What is the likely effect on the aggregate demand curve?

    <p>A leftward shift due to decreased investment spending by businesses. (D)</p> Signup and view all the answers

    Which of these would be considered a determinant of aggregate demand?

    <p>The amount of money in circulation (C)</p> Signup and view all the answers

    Which of the following would shift AD to the left? (Select all that apply)

    <p>Businesses expect weak economic growth. (C), The central bank raises interest rates. (D)</p> Signup and view all the answers

    If the domestic currency appreciates, how does it affect AD?

    <p>Net exports decrease, shifting AD to the left. (B)</p> Signup and view all the answers

    How would a boom in a major trading partner country affect domestic AD?

    <p>AD shifts to the right because foreign income increases. (A)</p> Signup and view all the answers

    If the central bank lowers interest rates, what is the likely impact on AD?

    <p>AD shifts to the right as borrowing becomes less expensive. (B)</p> Signup and view all the answers

    If inflation in an economy falls significantly, how does it affect AD?

    <p>AD shifts right as purchasing power increases. (C)</p> Signup and view all the answers

    Which of the following policies would most effectively decrease AD in an inflationary period?

    <p>Increasing taxes and reducing government spending. (C)</p> Signup and view all the answers

    If the government increases regulations on businesses, what will likely happen to AD?

    <p>AD will shift left as business costs rise. (B)</p> Signup and view all the answers

    If a country experiences a sharp increase in oil prices, how would this likely affect AD?

    <p>AD shifts left due to increased costs for businesses. (A)</p> Signup and view all the answers

    If the government imposes a tariff on imported goods, what will likely happen to aggregate demand (AD)?

    <p>AD will shift left as consumer prices increase. (D)</p> Signup and view all the answers

    If a major technological innovation leads to increased productivity, how would this likely affect AD?

    <p>AD shifts right due to increased business investment. (B)</p> Signup and view all the answers

    Flashcards

    Shift AD Left

    Occurs when government cuts spending, reducing Aggregate Demand (AD).

    Depreciation of Currency

    Leads to increased net exports, shifting AD to the right.

    Recession in Trading Partner

    Causes domestic AD to shift left due to decreased exports.

    High Interest Rates and AD

    Increasing rates make borrowing costly, shifting AD left.

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    Inflation's Effect on AD

    Rising inflation decreases purchasing power, shifting AD left.

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    Increase AD in Recession

    Lowering interest rates and increasing government spending boosts AD.

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    Subsidies for Businesses

    Increasing subsidies shifts AD right by encouraging investment.

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    Net Exports (X - M)

    The difference between exports and imports, influencing AD.

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    Economic Growth Expectations

    Positive growth expectations can increase investment and AD.

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    Aggregate Demand (AD)

    Total demand for goods and services in an economy at a given price level.

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    Components of AD

    C = Consumption, I = Investment, G = Government Spending, (X - M) = Net Exports.

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    Downward Sloping AD Curve

    The AD curve slopes downward because higher prices reduce purchasing power and net exports.

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    Movement along AD Curve

    A change in the price level causes a movement along the AD curve.

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    Shift in AD Curve

    A shift in the AD curve occurs due to changes in determinants like consumer confidence or taxes.

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    Rightward Shift in AD

    An increase in disposable income, such as through lower taxes, causes a rightward shift in AD.

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    Business Confidence and Investment

    Higher business confidence leads to increased investment spending, shifting AD to the right.

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    Factors NOT in AD

    Savings is not a component of aggregate demand as it represents unspent money.

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    Study Notes

    Aggregate Demand (AD) and the AD Curve

    • Aggregate Demand (AD): Represents the total spending on domestic goods and services at different price levels in an economy. It does not include savings.

    Components of AD

    • Components: Consumption (C), Government Spending (G), Net Exports (X - M).

    Shape of the AD Curve

    • Downward Sloping: The AD curve slopes downward because a higher price level reduces purchasing power and net exports, leading to decreased consumption, investment, and overall demand.

    Movements vs. Shifts in the AD Curve

    • Movement Along the Curve: Caused only by changes in the price level.
    • Shift of the Curve: Caused by changes in determinants of aggregate demand, such as consumer confidence, interest rates, or government spending.

    Causes of AD Shifts – Consumption (C)

    • Increase in AD: Lower income tax increases disposable income, boosting consumption.
    • Decrease in AD: Increase in interest rates, fall in consumer confidence and decrease in wealth levels decrease consumption.

    Causes of AD Shifts – Investment (I)

    • Increase in AD: Increased business confidence increases investment

    Causes of AD Shifts – Government Spending (G)

    • Increase in AD: Government increases spending.
    • Decrease in AD: Government cuts spending.

    Causes of AD Shifts – Net Exports (X – M)

    • Increase in AD: Domestic currency depreciation makes exports cheaper and increases net exports.
    • Decrease in AD: Domestic currency appreciation makes exports more expensive and decreases net exports.
    • Recession in Major Trading partner: Decreases demand for exports and shifts AD to the left.

    Interest Rates and AD

    • Increase in Interest Rates: Decreases AD, as borrowing becomes more expensive.
    • Decrease in Interest Rates: Increases AD.

    The Effect of Inflation on AD

    • Increased Inflation: Decreases AD as purchasing power declines.

    Higher-Order Thinking MCQs

    • Recession and AD Increase: Lowering interest rates and increasing government spending stimulates consumption and investment to increase AD during a recession.
    • Government Subsidies and AD: Government subsidies reduce business costs, increasing investment and shifting AD to the right.

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    Description

    Explore the concept of Aggregate Demand (AD) and its components in this quiz. Understand how various factors influence movements and shifts in the AD curve, and learn about the implications for consumption and overall economic activity.

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