Question

Explain whether each of the following events would cause a movement along or a shift in the position of the aggregate demand curve. In each case, explain why there is either a movement along or a shift in the aggregate demand curve.

Deflation has occurred during the past year.

An income tax rebate from the government to households, which they can apply only to purchases of goods and services.

There has been a depreciation of the U.S. dollar relative to the pound.

A decrease in incomes of foreign countries that key trading partners of the U.S.

Answer 1

AD curve shows the relationship between price level and the quantity of real GDP demanded. If only the price level changes, and other variables remain unchanged, there is a movement along the AD curve. If other variables, excluding the price level changes, then there is a shift in the AD curve.

Deflation, since only the price level changes, there is a movement down.

An income tax rebate means more consumer spending, a shift of the AD curve to the right.

A depreciation of the U.S. dollar leads to more exports, a shift of the AD curve to the right.

A decrease in incomes of foreign countries that trade with the U.S. Shift of the AD curve to the left as exports will decline.