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How is an aggregate demand curve derived? What would cause the aggregate demand curve...

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kila4112 | Student, Undergraduate | (Level 1) Honors

Posted February 4, 2014 at 4:42 AM via web

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How is an aggregate demand curve derived? What would cause the aggregate demand curve to shift to the right?

Macro Econ 3rd ed., McEachern

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justaguide | College Teacher | (Level 2) Distinguished Educator

Posted February 4, 2014 at 6:37 AM (Answer #1)

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In an economy, the total demand for goods and services is referred to as the aggregate demand. The quantity of goods and services bought is dependent on the price. The aggregate demand curve is a graphical representation of the price versus the gross domestic produce; or the GDP at different prices levels.

The shifting of the demand curve to the right implies that for the same price, the total goods and services being bought has increased. There are many factors that can result in this. Some of these include changes in interest rates, changes in government spending and investor demand. If the government were to increase spending to boost the economy, the aggregate demand curve shifts to the right. Similarly, a decrease in interest rates leads to the aggregate demand curve shifting to the right. An improvement in the state of the economy with rising income levels also increases the GDP at any particular price. This again shows up as the aggregate demand curve shifting to the right.

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sid-sarfraz | TA , Graduate | (Level 1) Honors

Posted November 27, 2014 at 7:09 PM (Answer #2)

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AGGREGATE DEMAND

The total amount of goods and services demanded in the economy at a given overall price level and in a given time period.

It is represented by the aggregate-demand curve, which describes the relationship between price levels and the quantity of output that firms are willing to provide. Normally there is a negative relationship between aggregate demand and the price level. Also known as "total spending".

Aggregate demand is the demand for the gross domestic product (GDP) of a country, and is represented by this formula: 


Aggregate Demand (AD) = C + I + G + (X-M) 

Where,

C = Consumers' expenditures on goods and services.

I = Investment spending by companies on capital goods.

G = Government expenditures on publicly provided goods and services.

X = Exports of goods and services.

M = Imports of goods and services.

Factors that cause the aggregate demand curve to shift are as follows:-

  • Exchange Rates: When a country's exchange rate increases, then net exports will decrease and aggregate expenditure will go down at all prices. This means that AD will decrease.
  • Distribution of Income: This is directly related to wages and profits. When worker's real wages increase, then people will have more money on their hands because their overall income has increased. When this happens they tend to consume more causing the consumption expenditures to increase. 
  • Expectations: Consumers tend to have certain expectations about the future of the economy and will adjust their spending accordingly. If they would expect the economy to not do so well in the future, saving would increase thus decrease overall expenditures. Rising price levels will cause aggregate demand to increase. If consumers foresee the price level to rise in the near future, they might just go out and buy that good now, increasing the consumption expenditures in AD. Many different expectations have the capacity to increase or decrease aggregate demand and it is not always clear as to how this will happen. 
  • Foreign Income: This relates U.S. economic output with the income of its trading partners in the world. When foreign income rises, U.S. exports will increase causing aggregate demand to increase.
  • Monetary and Fiscal Policies:  The government has some ability to impact AD. They can spend money or increase taxes in order to influence how consumers spend or save. An expansionary fiscal policy causes AD to increase, while a contraction monetary policy causes AD to decrease.
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sid-sarfraz | TA , Graduate | (Level 1) Honors

Posted November 27, 2014 at 7:14 PM (Answer #3)

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AGGREGATE DEMAND

The total amount of goods and services demanded in the economy at a given overall price level and in a given time period.

It is represented by the aggregate-demand curve, which describes the relationship between price levels and the quantity of output that firms are willing to provide. Normally there is a negative relationship between aggregate demand and the price level. Also known as "total spending".

Aggregate demand is the demand for the gross domestic product (GDP) of a country, and is represented by this formula: 


Aggregate Demand (AD) = C + I + G + (X-M) 

Where,

C = Consumers' expenditures on goods and services.

I = Investment spending by companies on capital goods.

G = Government expenditures on publicly provided goods and services.

X = Exports of goods and services.

M = Imports of goods and services.

Factors that cause the aggregate demand curve to shift are as follows:-

  • Exchange Rates: When a country's exchange rate increases, then net exports will decrease and aggregate expenditure will go down at all prices. This means that AD will decrease.
  • Distribution of Income: This is directly related to wages and profits. When worker's real wages increase, then people will have more money on their hands because their overall income has increased. When this happens they tend to consume more causing the consumption expenditures to increase. 
  • Expectations: Consumers tend to have certain expectations about the future of the economy and will adjust their spending accordingly. If they would expect the economy to not do so well in the future, saving would increase thus decrease overall expenditures. Rising price levels will cause aggregate demand to increase. If consumers foresee the price level to rise in the near future, they might just go out and buy that good now, increasing the consumption expenditures in AD. Many different expectations have the capacity to increase or decrease aggregate demand and it is not always clear as to how this will happen. 
  • Foreign Income: This relates U.S. economic output with the income of its trading partners in the world. When foreign income rises, U.S. exports will increase causing aggregate demand to increase.
  • Monetary and Fiscal Policies:  The government has some ability to impact AD. They can spend money or increase taxes in order to influence how consumers spend or save. An expansionary fiscal policy causes AD to increase, while a contraction monetary policy causes AD to decrease.

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