Q 2. Identify three factors that can ... [FREE SOLUTION]

Chapter 20: Q 2. (page 546)

Identify three factors that can shift the aggregate demand curve to the right and three different factors that can shift the aggregate demand curve to the left.

Short Answer

Expert verified

Three factors that can shift the aggregate

demand curve to the right are increase in government expenditure, increase in money supply and decrease in tax rates.

Three different factors that can shift the aggregate demand curve to the left are decrease in government expenditure, decrease in money supply and increase in tax rates.

Step by step solution

Step 1. Define aggregate demand and aggregate supply.

The total quantity of demand for all finished products and services generated in an economy is measured as aggregate demand.

Aggregate supply, often known as total production, is the whole supply of goods and services produced within an economy in a given period at a specific overall price.

Step 2. Three factors which can shift the Aggregate Demand curve to the right.

Increase in government expenditure- an increase in government spending directly changes the IS curve to the right, and consequently the AD curve to the right.

Increase in money supply: This will lower real interest rates, which will encourage investment and, as a result, alter the IS curve. And the movement in the IS curve will cause the AD curve to shift to the right.

Decrease in tax rates: Individuals will have greater disposable income as a result, and consumption demand will rise for a given marginal propensity to consume.

Step 3. Three factors which can shift the Aggregate Demand curve to the left.

Decrease in government expenditure: An decrease in government spending directly changes the IS curve to the left, and consequently the AD curve to the left.

Decrease in money supply: This will increase real interest rates, which will discourage investment and, as a result, alter the IS curve. And the movement in the IS curve will cause the AD curve to shift to the left.

Increase in tax rates: Individuals will have lower disposable income as a result, and consumption demand will fall for a given marginal propensity to consume.