Question

1. State whether the following events would shift the AD curve to the right, to the left, or not at all:

a. Foreign income decreases.

b. The stock market plunges in reaction to the November 8th election.

c. The distribution of income shifts toward wealthier families that purchase more imported goods.

d. Real estate values are rising rapidly.

Answer 1

a) Increase in foreign income increases demand of domestic goods which leads to increase in exports. When export component of AD increases then AD shifts to the right.

b) It will not affect AD curve.

c) When income of families which imports more increases then imports of domestic country increases which decreases AD. This causes leftward shift of AD curve.

d) Increase in real estate value decreases investment spending which reduces AD and shifts AD curve leftwards.