Question

4. Explain whether each of the following events would increase, decrease, or have no effect on the short-run aggregate demand curve:

a. Decrease in the U.S. price level makes American goods more attractive to foreign buyers.

b. Households decide to consume a larger share of their income.

c. Worsening profit expectations cause firms to decrease their expenditures on new machinery and equipment.

d. As the price level declines, the purchasing power of currency increases, and thus Americans increase their purchases of computers and office equipment.

e. Because of decreasing political tensions in North Korea, the U.S. Congress reduces purchases of jet fighters and tanks.

f. Economic expansion in Europe results in an increase in the European demand for Boeing jetliners.

g. Fearing a future economic downturn, households decide to save a larger fraction of their income.

Answer 1

A - This will increase aggregate demand because the exports will increase which is the part of AD.

B - Consumption is part of AD. Hence if the consumption will increase AD will also increase

C - Investment is a part of AD. Thus the capital expenditure reduction means reduction in investment and thus AD will also reduce

D - This will be considered as the increase in investment by the firms. Hence the AD will increase

E - This items will considered with governement purchase. The reduction in government purchase will lead to decrease in aggregate demand

F - This transaction will have positive impact upon US. The export of Boing will increase which will increase AD

G - This transaction will reduce the level of investment and consumption in economy and hence reduce the value of AD