Economics
Factors That Shift the Aggregate Demand Curve
Factors that shift the aggregate demand curve include changes in consumer confidence, government spending, and monetary policy. When consumer confidence is high, people are more likely to spend, shifting the aggregate demand curve to the right. Similarly, increases in government spending or expansionary monetary policy can also shift the curve to the right, while decreases in these factors can shift it to the left.
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12 Key excerpts on "Factors That Shift the Aggregate Demand Curve"
eBook - PDF- Steven A. Greenlaw, Timothy Taylor(Authors)
- 2014(Publication Date)
- Openstax(Publisher)
Other Supply Shocks The aggregate supply curve can also shift due to shocks to input goods or labor. For example, an unexpected early freeze could destroy a large number of agricultural crops, a shock that would shift the AS curve to the left since there would be fewer agricultural products available at any given price. Similarly, shocks to the labor market can affect aggregate supply. An extreme example might be an overseas war that required a large number of workers to cease their ordinary production in order to go fight for their country. In this case, aggregate supply would shift to the left because there would be fewer workers available to produce goods at any given price. 11.4 | Shifts in Aggregate Demand By the end of this section, you will be able to: • Explain how imports influence aggregate demand • Identify ways in which business confidence and consumer confidence can affect aggregate demand • Explain how government policy can change aggregate demand • Evaluate why economists disagree on the topic of tax cuts As mentioned previously, the components of aggregate demand are consumption spending (C), investment spending (I), government spending (G), and spending on exports (X) minus imports (M). (Read the following Clear It Up feature for explanation of why imports are subtracted from exports and what this means for aggregate demand.) A shift of the AD curve to the right means that at least one of these components increased so that a greater amount of total spending would occur at every price level. A shift of the AD curve to the left means that at least one of these components decreased so that a lesser amount of total spending would occur at every price level. The Keynesian Perspective will discuss the components of aggregate demand and the factors that affect them. Here, the discussion will sketch two broad categories that could cause AD curves to shift: changes in the behavior of consumers or firms and changes in government tax or spending policy.
eBook - PDF- Steven A. Greenlaw, David Shapiro, Daniel MacDonald(Authors)
- 2022(Publication Date)
- Openstax(Publisher)
Government spending and tax rate changes can be useful tools to affect aggregate demand. We will discuss these in greater detail in the Government Budgets and Fiscal Policy chapter and The Impacts of Government Borrowing. Other policy tools can shift the aggregate demand curve as well. For example, as we will discuss in the Monetary Policy and Bank Regulation chapter, the Federal Reserve can affect interest rates and credit availability. Higher interest rates tend to discourage borrowing and thus reduce both household spending on big-ticket items like houses and cars and investment spending by business. Conversely, lower interest rates will stimulate consumption and investment demand. Interest rates can also affect exchange rates, which in turn will have effects on the export and import components of aggregate demand. Clarifying the details of these alternative policies and how they affect the components of aggregate demand can wait for The Keynesian Perspective chapter. Here, the key lesson is that a shift of the aggregate demand curve to the right leads to a greater real GDP and to upward pressure on the price level. Conversely, a shift of aggregate demand to the left leads to a lower real GDP and a lower price level. Whether these changes in output and price level are relatively large or relatively small, and how the change in equilibrium relates to potential GDP, depends on whether the shift in the AD curve is happening in the AS curve's relatively flat or relatively steep portion.
eBook - PDF- William Boyes, Michael Melvin(Authors)
- 2015(Publication Date)
- Cengage Learning EMEA(Publisher)
These effects explain movements along a given AD curve. 4. The aggregate demand curve shifts with changes in the nonprice determinants of aggregate demand: expectations, foreign income and price levels, and government policy. 3. What factors affect aggregate supply? 158 Chapter 8 Macroeconomic Equilibrium: Aggregate Demand and Supply Copyright 2016 Cengage Learning. All Rights Reserved. May not be copied, scanned, or duplicated, in whole or in part. Due to electronic rights, some third party content may be suppressed from the eBook and/or eChapter(s). Editorial review has deemed that any suppressed content does not materially affect the overall learning experience. Cengage Learning reserves the right to remove additional content at any time if subsequent rights restrictions require it. 8-4b-1 Short-Run Aggregate Supply Curve Figure 9 represents the general shape of the short-run aggregate supply curve. In Figure 10, you see a more realistic version of the same curve—its steepness varies. The steepness of the aggregate supply curve depends on the ability and willingness of producers to respond to price-level changes in the short run. Figure 10 shows the typical shape of the short-run aggregate supply curve. Notice that as the level of real GDP increases in Figure 10, the AS curve becomes steeper. This is because each increase in output requires firms to hire more and more resources, until eventually full capacity is reached in some areas of the economy, resources are fully employed, and some firms reach maximum output. At this point, increases in the price level bring about smaller and smaller increases in output from firms as a whole. The short-run aggregate supply curve becomes increasingly steep as the economy approaches maximum output. 8-4b-2 Long-Run Aggregate Supply Curve Aggregate supply in the short run is dif-ferent from aggregate supply in the long run (see Figure 11).
eBook - PDF- William Boyes, Michael Melvin(Authors)
- 2015(Publication Date)
- Cengage Learning EMEA(Publisher)
We devote an entire chapter to fiscal policy, an examination of the effect of taxes and government spending on aggregate demand. In another chapter, on monetary policy, we describe how changes in the money supply can cause the aggregate demand curve to shift. FIGURE 8 Shifting the Aggregate Demand Curve Price Level Increase in Aggregate Demand Decrease in Aggregate Demand AD 2 AD 0 AD 1 Real GDP As aggregate demand increases, the AD curve shifts to the right, like the shift from AD 0 to AD 1 . At every price level, the quantity of output demanded increases. As aggregate demand falls, the AD curve shifts to the left, like the shift from AD 0 to AD 2 . At every price level, the quantity of output demanded falls. Higher foreign income increases net exports and aggregate demand; lower foreign income reduces net exports and aggregate demand. Changes in the level of foreign prices change domestic net exports and aggregate demand in the same direction. 1 This assumes no change in exchange rates. If the Brazilian currency were to depreciate in value as Brazilian prices rose, then the cheaper exchange rate would at least partially offset the higher price and reduce the impact of the price change on exports. Chapter 8 Macroeconomic Equilibrium: Aggregate Demand and Supply 157 Copyright 2016 Cengage Learning. All Rights Reserved. May not be copied, scanned, or duplicated, in whole or in part. Due to electronic rights, some third party content may be suppressed from the eBook and/or eChapter(s). Editorial review has deemed that any suppressed content does not materially affect the overall learning experience. Cengage Learning reserves the right to remove additional content at any time if subsequent rights restrictions require it. 8-4 Aggregate Supply The aggregate supply curve shows the quantity of real GDP produced at different price lev-els.
eBook - PDFMacroeconomics for Business
The Manager's Way of Understanding the Global Economy
- Lawrence S. Davidson, Andreas Hauskrecht, Jürgen von Hagen(Authors)
- 2020(Publication Date)
- Cambridge University Press(Publisher)
The negative slope of the AD curve indicates that, as the price level rises, aggregate demand falls, while, as the price level falls, aggregate demand rises. Let’s make sure we understand this graph properly. There are many more graphs to follow in this book and it is important to interpret them properly. The AD curve shows the relationship between the price level and aggregate demand assuming that all other causal factors that could change aggregate demand are fixed. If the price level is actually P 0 , AD will be AD 0 . Movements of the price level up and down lead to movements along the AD curve as indicated by the arrows, inducing lower or higher aggregate demand. But, what if the other causal factors are not fixed? Consider an increase in government spending on goods and services. It implies that the same price level as before is now associated with a higher level of aggregate demand. Graphically, this means that the AD curve shifts to the right as shown by the blue arrow pointing rightward in Figure 2.9. The new AD curve is represented by the dotted line and the new level of aggregate demand is AD 1 . Conversely, if the government reduces government spending, the AD curve shifts to the left as indicated by the blue arrow pointing leftward. For a given price level, aggregate demand falls. The same arguments apply for the other causal factors affecting aggregate demand listed above. Other factors that shift the AD curve include, real interest rates, government spending, taxes, consumer and business confidence, and more. We use diagrams like this to illustrate and analyze macroeconomic developments and policies. Of course, such an explanation is only qualitative. It shows tendencies, not exact results. But it is useful. Always be sure to know which variables are on the P AD P 0 AD 0 AD 1 Figure 2.9 Shifts in the AD curve 76 Aggregate Demand
eBook - PDF- David Shapiro, Daniel MacDonald, Steven A. Greenlaw(Authors)
- 2022(Publication Date)
- Openstax(Publisher)
(Read the following Clear It Up feature for explanation of why imports are subtracted from exports and what this means for aggregate demand.) A shift of the AD curve to the right means that at least one of these components increased so that a greater amount of total spending would occur at every price level. A shift of the AD curve to the left means that at least one of these components decreased so that a lesser amount of total spending would occur at every price level. The Keynesian Perspective will discuss the components of aggregate demand and the factors that affect them. Here, the discussion will sketch two broad categories that could cause AD curves to 282 11 • The Aggregate Demand/Aggregate Supply Model Access for free at openstax.org shift: changes in consumer or firm behavior and changes in government tax or spending policy. Do imports diminish aggregate demand? We have seen that the formula for aggregate demand is AD = C + I + G + X - M, where M is the total value of imported goods. Why is there a minus sign in front of imports? Does this mean that more imports will result in a lower level of aggregate demand? The short answer is yes, because aggregate demand is defined as total demand for domestically produced goods and services. When an American buys a foreign product, for example, it gets counted along with all the other consumption. Thus, the income generated does not go to American producers, but rather to producers in another country. It would be wrong to count this as part of domestic demand. Therefore, imports added in consumption are subtracted back out in the M term of the equation. Because of the way in which we write the demand equation, it is easy to make the mistake of thinking that imports are bad for the economy. Just keep in mind that every negative number in the M term has a corresponding positive number in the C or I or G term, and they always cancel out.
eBook - PDF- Rhona C. Free(Author)
- 2010(Publication Date)
- SAGE Publications, Inc(Publisher)
If any of them fall, aggregate demand will shift to the left. As detailed at the end of the previous section, that will cause a temporary decline in real GDP, otherwise known as a recession. If any of the components rise, aggregate demand will shift right. For example, in Figure 32.2, begin with AD, and SRAS,. At P, and Y n , the economy is in short-run and long-run equilibrium. If aggregate demand rises to AD 2 , the short-run result is an increase in the price level to P 3 and an increase in real GDP above Y . The economy is in a boom n period. Eventually, price expectations will be revised upward, and the short-run aggregate supply curve will shift left to SRAS 2 . When that happens, the boom is over and the economy returns to its long-run trend. The key point is that fluctuations in aggregate demand cause fluctuations in real GDP. The components of aggre-gate demand are each influenced by a large number of vari-ables. It is therefore not surprising that aggregate demand fluctuates. The model shows how fluctuations in demand are translated into fluctuations in real GDP. Of all of the components of aggregate demand, desired investment spending is the most volatile. As John Maynard Keynes (1936/1964) emphasized, investment is extremely sensitive to the state of expectations. That is because investors face known present costs and uncertain future returns. The decision to build a factory is an act of faith. The investor can never be certain what future demand for the factory's output will be. A recession may suppress demand and lower price. Technological change may make it obsolete. There is no way to precisely calculate the return on the factory, and Keynes argued that one typically does not even know enough to establish probabilities. It is no surprise that waves of optimism or pessimism among investors can lead to significant fluctuations in investment, aggregate demand, and real GDP.
eBook - PDFEconomics
A Contemporary Introduction
- William A. McEachern(Author)
- 2016(Publication Date)
- Cengage Learning EMEA(Publisher)
Cengage Learning reserves the right to remove additional content at any time if subsequent rights restrictions require it. Chapter 23 Aggregate Demand 541 EXHIBIT 10 A Shift of the Aggregate Expenditure Line That Shifts the Aggregate Demand Curve A shift of the aggregate expenditure line at a given price level shifts the aggregate demand curve. In panel (a), an increase in investment of $0.1 trillion, with the price level constant at 110, causes the aggregate expenditure line to increase from C 1 I 1 G 1 (X 2 M) to C 1 I9 1 G 1 (X 2 M). As a result, real GDP demanded increases from $17.0 trillion to $17.5 trillion. In panel (b), the aggregate demand curve has shifted from AD out to AD9. At the prevailing price level of 110, real GDP demanded has increased by $0.5 trillion. Aggregate expenditure (trillions of dollars) Price level 0 17.0 17.5 Real GDP (trillions of dollars) 0 17.0 17.5 Real GDP (trillions of dollars) 110 (a) Investment increase shifts up the aggregate expenditure line (b) Investment increase shifts aggregate demand rightward AD C + I + G + (X – M) 45˚ e e' e e' C + I ' + G + (X – M) AD' 0.1 Copyright 2017 Cengage Learning. All Rights Reserved. May not be copied, scanned, or duplicated, in whole or in part. Due to electronic rights, some third party content may be suppressed from the eBook and/or eChapter(s). Editorial review has deemed that any suppressed content does not materially affect the overall learning experience. Cengage Learning reserves the right to remove additional content at any time if subsequent rights restrictions require it. 542 Part 6 Fundamentals of Macroeconomics Key Concepts 23-7 Conclusion This chapter began with the relationship between consumption and income. Simply put, consumption increases with income, other things constant. We used this link to develop the aggregate expenditure line and the quantity of real GDP demanded for a given price level.
eBook - PDFEconomics
Principles & Policy
- William Baumol, Alan Blinder, John Solow, , William Baumol, Alan Blinder, John Solow(Authors)
- 2019(Publication Date)
- Cengage Learning EMEA(Publisher)
Due to electronic rights, some third party content may be suppressed from the eBook and/or eChapter(s). Editorial review has deemed that any suppressed content does not materially affect the overall learning experience. Cengage Learning reserves the right to remove additional content at any time if subsequent rights restrictions require it. Chapter 24 Aggregate Demand and the Powerful Consumer 519 Several factors that influence how much businesses want to invest were discussed in the previous chapter, including interest rates, tax provisions, technical change, and the strength of the economy. Sometimes these determinants change abruptly, leading to dramatic vari- ations in investment. For example, corporate taxes were cut dramatically in the December 2017 tax bill, with the explicit purpose of boosting business investment. (As this edition went to press, it was too early to appraise the results.) Perhaps the most important factor accounting for the volatility of investment spending was not discussed much in the previous chapter: the state of business confidence, which in turn depends on expectations about the future. Although confidence is tricky to measure, it does seem obvious that businesses will build more factories and purchase more new machines when they are optimistic. Correspondingly, their investment plans will be cautious if the economic outlook appears bleak. Keynes pointed out that psychological perceptions such as these are subject to abrupt shifts, so that fluctuations in investment can be a major cause of instability in aggregate demand. Unfortunately, neither economists nor, for that matter, psychologists have many good ways to measure—much less to control—business confidence. So economists usually focus on several more objective determinants of investment that are easier to quantify and even influence—factors such as interest rates and tax provisions.
eBook - PDFMacroeconomics
A Contemporary Introduction
- William A. McEachern(Author)
- 2016(Publication Date)
- Cengage Learning EMEA(Publisher)
All Rights Reserved. May not be copied, scanned, or duplicated, in whole or in part. Due to electronic rights, some third party content may be suppressed from the eBook and/or eChapter(s). Editorial review has deemed that any suppressed content does not materially affect the overall learning experience. Cengage Learning reserves the right to remove additional content at any time if subsequent rights restrictions require it. 208 Part 2 Fundamentals of Macroeconomics 9-6c The Multiplier and Shifts in Aggregate Demand Now that you have some idea how changes in the price level shift the aggregate expen- diture line to generate the aggregate demand curve, let’s reverse course and return to the situation where the price level is assumed to remain constant. What we want to do now is trace through the effects of a shift of a spending component on aggregate demand, assuming the price level does not change. For example, suppose that a jump in business confidence spurs a $0.1 trillion increase in investment at each real GDP level. Each panel of Exhibit 10 shows a different way of expressing the effects of an increase in spending on real GDP demanded, assuming the price level remains unchanged. Panel (a) presents the income-expenditure model and panel (b), the aggregate demand model. Again, the two panels measure real GDP on the horizontal axes. At a price level of 110 in panel (a), the aggregate expenditure line, C 1 I 1 G 1 (X 2 M), intersects the 45-degree line at point e to yield $17.0 trillion in real GDP demanded. Panel (b) shows more directly the link be- tween real GDP demanded and the price level. As you can see, when the price level is 110, real GDP demanded is $17.0 trillion, identified as point e on the aggregate demand curve. Exhibit 10 shows how a shift of the aggregate expenditure line relates to a shift of the aggregate demand curve, given a constant price level.
eBook - PDFMacroeconomics
Principles and Policy
- William Baumol, Alan Blinder(Authors)
- 2015(Publication Date)
- Cengage Learning EMEA(Publisher)
T h is re l ations h ip b etween t h e price l eve l an d rea l GDP ( d epicte d in Figure 6) is precise l y w h at we called the aggregate demand curve in earlier chapters. It comes directl y from the 45 lin e d iagrams in Figure 5. T h us, points E 0 , E 1 , an d E 2 in Figure 6 correspon d precise ly to t h e points b earin g t h e same l a b e l s in Fi g ure 5 . C 1 C 0 C 2 A Real Disposable Income Real Consumer Spending Effect of changes in real income Higher price level Lower price level Figure 4 How the Price Level Shifts the Consumption Function 45 45 E 1 C 1 + I + G + ( X – IM ) E 0 Y 1 Y 0 C 0 + I + G + ( X – IM ) Real GDP Real Expenditure (a) Rise in Price Level E 2 C 2 + I + G + ( X – IM ) E 0 Y 2 Y 0 C 0 + I + G + ( X – IM ) Real GDP Real Expenditure (b) Fall in Price Level 45 45 Figure 5 The Effect of the Price Level on Equilibrium Aggregate Quantity Demanded Copyright 2016 Cengage Learning. All Rights Reserved. May not be copied, scanned, or duplicated, in whole or in part. Due to electronic rights, some third party content may be suppressed from the eBook and/or eChapter(s). Editorial review has deemed that any suppressed content does not materially affect the overall learning experience. Cengage Learning reserves the right to remove additional content at any time if subsequent rights restrictions require it. 176 Part 2 The Macroeconomy: Aggregate Supply and Demand The e ff ect o f hi g her prices on consumer wealth is j ust one o f sev-eral reasons why the aggregate demand curve slopes downward. A second reason comes from international trade. In Cha p ter 8’s discussion of the determinants of net ex p orts, we p ointed out that hi g her U.S. prices (holdin g forei g n prices constant) will depress exports ( X ) an d stimu l ate imports ( IM ) . T h at means t h at, h o ld -in g other thin g s equal, a hi g her U.S.
eBook - PDFMacroeconomics
Principles & Policy
- William Baumol, Alan Blinder, John Solow, , William Baumol, Alan Blinder, John Solow(Authors)
- 2019(Publication Date)
- Cengage Learning EMEA(Publisher)
The opposite is true to the right of point E. Here spending falls short of output, inventories rise, and firms will cut back on production—thereby moving closer to E. In other words, whenever production is above the equilibrium level, market forces will drive output down. And whenever production is below equilibrium, market forces will drive output up. In either case, deviations from demand-side equilibrium will gradually be eliminated. Diagrams such as Figure 3 will recur so frequently in this and coming chapters that it is convenient to have a special name for them. We call them income-expenditure diagrams, because they show how expenditures vary with income, or simply 458 line diagrams. 9-3 THE AGGREGATE DEMAND CURVE Chapter 5 introduced aggregate demand and aggregate supply curves relating aggregate quantities demanded and supplied to the price level. The expenditure schedule graphed in Figure 3 is not the aggregate demand curve, for we have yet to bring the price level into our discussion. It is now time to remedy this omission and derive the aggregate demand curve. To do so, we need only recall something we learned in the last chapter: that households own a great deal of money-fixed assets whose real value declines when the price level rises. The money in your bank account is a prime example. If prices rise, that money will buy less. Because of that fact, consumers’ real wealth declines whenever the price level rises—and that decreases their spending. Specifically: Higher prices decrease the demand for goods and services because they erode the purchasing power of consumer wealth. Conversely, lower prices increase the demand for goods and services by enhancing the purchasing power of consumer wealth. For these reasons, a change in the price level will shift the entire consumption function.
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