Question

2. Describe and briefly explain whether the following changes cause the aggregate demand to increase, decrease or neither:

a. The price level increases

b. Investment decreases

c. Imports increase and exports decrease

d. Consumer optimism improves

e. Government increases infrastructure spending

f. Stock market crashes.

Answer 1

a) An increase in the price level will only cause a shift along the demand curve and that will not change the demand curve.

b) investment decrease will shift the demand curve to the left and decease the demand in the market. It will reduce the economic activity in the market and decrease the demand.

c) It will shift the aggregate demand curve to the left and decrease it. As fall in the export will decrease the aggregate demand.

d) As consumer optimism increase it will increase the economic activity and that will increase the aggregate demand.

e) An increase in the government spending will increase the demand and shift the demand curve to the right

f) Stock market crash will decease the income and that will decease the demand in the market.