Asked Oct 19, 2019

Indicate how each of the following events would affect the aggregate demand AD curve:



    1. a short-run decrease in the price level
    2. an increase in consumer confidence on the price level and real GDP
    3. an increase in government purchases

Expert Answer

Step 1

Investment and consumption are positively related to output as seen in equation 1. So, if keeping other variable constant with the decrease in price level people will have more disposable income to consume or invest this will raise the aggregate demand and lead to a rightward shift in the aggregate demand curve. 

Y G +IC-M +X..
In the above equation
Y output
G Government spending
I Investment
X Export
M Import

Image Transcriptionclose

Y G +IC-M +X.. ..(1) In the above equation Y output G Government spending I Investment X Export M Import

Step 2

b) As from the equation"1" that Government expenditure, Consumption and Investment has a positive effect on the output. An increase in consumer confidence on...

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