Question

Explain how each of the following factors would influence aggregate demand in the United States. Be sure to explain which component of aggregate demand would be affected.

"C" = consumption, "I" = investment, "G" = government expenditures, "NX" = net exports

Use only the following terms to fill in the blanks (do not include the quotes): "C", "I", "G", "NX", and "increase" or "decrease":

Your answer should look similar to this: NX will increase, causing AD to increase.

a.         a stock market crash:_______ will______ , causing AD to_______ .

b.         an increase in the personal income tax rate:_______will_______ , causing AD to_______ .

c.         a decrease in the real interest rate:_______and_______ will_______ , causing AD to_______ .

d.         an increase in government purchases: _______will_______ , causing AD to_______ .

e.         a decline in income in Canada:_______will_______ , causing AD to_______ .

Answer 1

a) Stock market crash will lower the wealth of households and this will cause consumption to decrease and so AD will decrease.

b)   an increase in the personal income tax rate: this will cause consumption to decrease and so AD will decrease.

c)   a decrease in the real interest rate: will cause investment and consumption to increase and causing AD to increase.

d)  an increase in government purchases will cause government expenditure to increase and hence AD will also increase.

e)   a decline in income in Canada will cause  NX will decrease, causing AD to decrease