Textbook Problem

Describe what the effect on aggregate demand would be, other things being equal, if

a. exports increase.

b. both imports and exports decrease.

c. consumption decreases.

d. Investment increases.

e. investment decreases and government purchases increase.

f. the price level increases.

g. the price level decreases.

To determine

(a)

To explain:

The effect on aggregate demand, if export increase provided other things being equal.

Answer to Problem 1P

When the export increases, the aggregate demand also increases.

Explanation of Solution

When the exports increases, it represents the increase in demand forgoods in the foreign market. Therefore, the increased demand leads to an increase in aggregate demand.

Economics Concept Introduction

Aggregate demand:

It represents the total goods and services that are demanded at a given point of time. As the price level and gross domestic product demand share an inverse relationship, the demand curve slopes downwards when the price becomes high.

To determine

(b)

To explain:

The effect on aggregate demand, if both import and export decreases provided other thingsbeing equal.

Answer to Problem 1P

The effect will be intermediate on the aggregate demand, if both the exports and imports decreases.

Explanation of Solution

The aggregate demand increases with an increase in export while it decreases with the increase in import.In this case,both of them are decreasing.Thus, the change will depend upon the export or import whichever is more intense.

Economics Concept Introduction

Aggregate demand:

It represents the total goods and services that are demanded at a given point of time. As the price level and gross domestic product demand share an inverse relationship, the demand curve slopes downwards when the price becomes high.

To determine

(c)

To explain:

The effect on aggregate demand, if consumption decreases provided other thingsbeing equal.

Answer to Problem 1P

The aggregate demand will increase with an increase in consumption.

Explanation of Solution

The aggregate demand will raise with the increase in consumption of goods and services. More will be the consumption of products, more will be the demand.

Economics Concept Introduction

Aggregate demand:

It represents the total goods and services that are demanded at a given point of time. As the price level and gross domestic product demand share an inverse relationship, the demand curve slopes downwards when the price becomes high.

To determine

(d)

To explain:

The effect on aggregate demand, if investment increases provided other things being equal.

Answer to Problem 1P

The increase in investment will increase the aggregate demand.

Explanation of Solution

The aggregate demand will increase with the increase in investment in capital goods. Investment made in new technology, building new infrastructure, purchasing new machines would lead to an increase in the income of the people.Thus, the purchasing power will increase causing an increase in aggregate demand.

Economics Concept Introduction

Aggregate demand:

It represents the total goods and services that are demanded at a given point of time. As the price level and gross domestic product demand share an inverse relationship, the demand curve slopes downwards when the price becomes high.

To determine

(e)

To explain:

The effect on aggregate demand, if investment decreases and government purchase increase provided other thingsbeing equal.

Answer to Problem 1P

If the investment decreases and the government purchase increases, the effect on aggregate demand will be intermediate.

Explanation of Solution

The decrease in investment leads to fall in demand, whereas, the increase in government purchases lead to increase in demand.The change in aggregate demand will depend upon the intensity, accordingly the aggregate demand will shift towards left or right.

Economics Concept Introduction

Aggregate demand:

It represents the total goods and services that are demanded at a given point of time. As the price level and gross domestic product demand share an inverse relationship, the demand curve slopes downwards when the price becomes high.

To determine

(f)

To explain:

The effect on aggregate demand, if the price increases provided other thingsbeing equal.

Answer to Problem 1P

If the price level increases, there will be a decrease in the aggregate demand.

Explanation of Solution

The increase intheprice level will decrease the purchasing power of the consumers. This will lead to fall in the value of currency, decreasing the aggregate demand.

Economics Concept Introduction

Aggregate demand:

It represents the total goods and services that are demanded at a given point of time. As the price level and gross domestic product demand share an inverse relationship, the demand curve slopes downwards when the price becomes high.

To determine

(g)

To explain:

The effect on aggregate demand, if the price level decreases provided other thingsbeing equal.

Answer to Problem 1P

The aggregate demand will increase with a decrease in the price level.

Explanation of Solution

The decrease in the price level increases the purchasing power of the consumers.Thus, it will increase the demand forgoods and services.

Economics Concept Introduction

Aggregate demand:

It represents the total goods and services that are demanded at a given point of time. As the price level and gross domestic product demand share an inverse relationship, the demand curve slopes downwards when the price becomes high.