Economics
Factors That Shift the Aggregate Demand Curve
Factors that shift the aggregate demand curve include changes in consumer confidence, government spending, and monetary policy. When consumer confidence is high, people are more likely to spend, shifting the aggregate demand curve to the right. Similarly, increases in government spending or expansionary monetary policy can also shift the curve to the right, while decreases in these factors can shift it to the left.
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7 Key excerpts on "Factors That Shift the Aggregate Demand Curve"
eBook - ePub- W. Charles Sawyer, Richard L. Sprinkle(Authors)
- 2020(Publication Date)
- Routledge(Publisher)
Table 16.1 provides a list of factors that can cause the aggregate demand curve to increase or decrease.TABLE 16.1Determinants or Factors That Shift the Aggregate Demand Curve Change in consumption spending Change in consumer wealth Change in consumer expectations Change in consumer indebtedness Change in taxes Change in investment spending Change in interest rates Change in business expectations Change in business taxes Change in government spending Change in federal, state, and local government spending Change in exports and imports Change in foreign income Change in exchange rates AGGREGATE SUPPLYAggregate demand, or total spending, is only one side of the output market. In order to determine the equilibrium price level and equilibrium level of total output (GDP) for an open economy, we need to describe total production (or supply) of goods and services. Aggregate supply is the relationship between the total quantity of goods and services an economy produces at various price levels, holding all other determinants of production unchanged. The aggregate supply (AS) curve is a graphical representation of aggregate supply as shown in Figure 16.3
eBook - ePubA Primer on Macroeconomics, Second Edition, Volume II
Policies and Perspectives
- Thomas M. Beveridge(Author)
- 2018(Publication Date)
- Business Expert Press(Publisher)
Factors That Can Shift the Aggregate Demand Curve, is associated with the Netherlands. The foreign trade effect states that, as the aggregate price level increases, net exports will decrease. In Nepal, the effect on aggregate quantity demanded will be slight but, in the Netherlands, a substantial contraction in aggregate quantity demanded will take place. The stronger the foreign trade effect, the flatter the AD curve.Government PolicyThe three effects just described explain why the aggregate demand curve is negatively sloped. What, though, may cause the AD curve to shift position? Except for a change in the aggregate price level or real GDP, anything that causes intended consumption, investment, government spending, or net exports to change will cause the AD curve to shift position—to the right for an increase in aggregate demand, as shown inFigure 5.3 , and to the left for a decrease. We identify seven major factors.Fiscal and monetary policies are the two broad branches of government economic policy. Fiscal policy is intended to manipulate the economy through changes in government spending and net taxes, and monetary policy operates through changes in the financial sector. An expansionary policy is intended to make the economy grow by shifting the AD curve to the right whereas a contractionary policy’s intent is to dampen down economic activity by shifting the AD curve to the left.Fiscal Policy : Government spending (G) is one of the components of aggregate demand—an increase in government spending will shift the aggregate demand to the right —an expansionary fiscal policy . Net taxes (T), or taxes minus transfers, are taxes paid to the government by firms and households less transfer payments received by households and firms. A decrease in net taxes (either a decrease in personal taxes or an increase in transfer payments to households) would boost disposable income and encourage increased consumption, shifting the AD curve to the right—an expansionary fiscal policy. Further, the introduction of a policy such as an investment-tax credit, or reduced taxes on corporate income, would stimulate additional investment spending. Decreasing government spending or increasing net taxes will shift the AD curve to the left. In
eBook - ePub- Harlan M. Smith(Author)
- 2016(Publication Date)
- Routledge(Publisher)
Finally, the reconceived aggregate supply curve just discussed is a one-directional curve. The upswing of a business cycle may be described by the curve, but when a downswing follows, the economy does not ride back down the curve, with prices falling but no output drop at first. Rather, output tends to drop first, for reasons explained by various institutional semi-rigidities in prices and wages, and only after prolonged unemployment and recession are prices likely to drop much. The result is a sort of spiral in wages and prices over cycles, and an upward trend in the price level over time. Successive cycles move the Phase 3 line slowly to the right, representing increases in potential output arising from growth in productivity and in the volume of employed resources (capital and labor).Reviewing now the analysis of the shift from the micro to the macro level in the treatment of demand and supply, the analysis led to dropping the aggregate demand curve, substituting the total volume of spending, and reinterpreting the aggregate supply curve. At the macro level, quantities supplied and quantities demanded are never even semi-independent but each is the major determinant of the other, and neither can be treated as an independent function of price. Changes in aggregate quantity supplied are ordinarily based upon expected changes in the aggregate quantity demanded, but innovation or other changes on the supply side can occur independently and produce changes in aggregate demand. We also have analyzed the things that determine some degree of accompanying change in the price level.The textbooks discuss how a change in the aggregate demand or supply curve produces a new equilibrium. But this should be only a stepping-stone to discussing the somewhat irregular fluctuations in output that we often lump under the heading of business cycles. Economic historians can tell us that each “cycle” is somewhat unique, but economists ignore their uniqueness, however important the differences may sometimes be, to focus upon common features. Clearly changes in the rate of real investment are the main driving force in these cycles. Explanation of its changes is not simple. But students should learn that a cycle can be generated just by the combination of the multiplier and acceleration principles. First let us look at the downswing of a cycle.
eBook - ePub- Neva Goodwin, Jonathan M. Harris, Pratistha Joshi Rajkarnikar, Brian Roach, Tim B. Thornton(Authors)
- 2020(Publication Date)
- Routledge(Publisher)
P is the general price level. This has an effect similar to contractionary monetary policy, raising interest rates, discouraging investment, and lowering aggregate demand.- Inflation hurts net exports by making domestically produced goods more expensive for foreigners and imports more attractive for domestic consumers. This decreases aggregate demand by decreasing net exports.2
- The Federal Reserve generally responds to higher inflation by raising interest rates, as discussed in Chapter 11 . This also tends to lower investment and total demand.
real wealth effect: the tendency of consumers to increase or decrease their consumption based on their perceived level of wealthreal money supply: the nominal money supply divided by the general price level (as measured by a price index), expressed as M/PThere is some disagreement among economists about which of these effects are most significant, but there is little doubt about the overall result: higher inflation results in lower aggregate demand levels. Note that every point on the aggregate demand curve is an economic equilibrium, where output, income, and spending are equal. (Recall our discussion on economic equilibrium from Chapter 9 .)1.2 Shifts of the Aggregate Demand Curve: Spending and TaxationThe downward slope of the AD curve shown in Figure 12.1 is based on the indirect impacts of inflation on aggregate demand, as discussed previously. What determines the position of the curve? The position of the AD curve depends on specific levels of government spending, taxation, autonomous consumption, autonomous investment, and autonomous net exports.3 Changes in these variables will therefore cause the AD curve to shift.Figure 12.2The Effect of Expansionary Fiscal Policy or Increased Confidence on the AD CurveFor example, if the government were to undertake expansionary fiscal policy, this would shift the AD curve to the right, as illustrated in Figure 12.2
eBook - ePubThe Macroeconomic Environment of Business
Core Concepts and Curious Connections
- Maurice D Levi(Author)
- 2014(Publication Date)
- WSPC(Publisher)
Fig. 6.5.Fig. 6.5. Aggregate demand and real GDP versus prices.The AD curves slope down because a lower price level raises the real value of fixed face value assets including money, plus exports. If prices rise only after GDP reaches capacity, variations in AD are associated with variations in real GDP below capacity and with nominal GDP above capacity.Figure 6.5 shows aggregate demand curves and an aggregate supply curve for an economy. These curves should not be confused with those used in the microeconomic theory of supply and demand because here we are referring to total or aggregate demand and supply in an economy, not supply and demand in individual markets.The aggregate demand curve shows how much demand there is for an economy’s total output at different price levels. It does not slope downwards because lower prices make one good cheaper than another good, which is the reason for downward-sloping demand in microeconomics. Rather, the aggregate demand curve slopes downwards because:(1)A lower price level makes peoples’ assets with a given face value, such as currency, worth more. This is called a wealth effect, and leads to increased consumption, C.(2)A lower price level reduces the demand for money. (If things cost less you need less money to pay for them. This was explained in Chapter 3 ). For a given money supply, the lower demand for money means an excess supply of money. This causes extra expenditure on goods and bonds as people try to reduce their money holdings. The buying of goods directly affects total expenditure, E, via affecting C. The buying of bonds causes higher bond prices. This means lower interest rates, and more investment, I.5
eBook - ePubManagement Economics: An Accelerated Approach
An Accelerated Approach
- William G. Forgang, Karl W. Einolf(Authors)
- 2015(Publication Date)
- Routledge(Publisher)
operational lag: the unemployment must be recognized and a spending or tax bill proposed, passed, and implemented before the multiplier begins. The lag effect of fiscal policy creates problems. Policy makers must forecast future economic conditions and initiate policy before macroeconomic problems occur. Once policy initiatives are undertaken, it takes time for those actions to affect the macroeconomy.Supply-Side EconomicsTable 2.10 traces the macroeconomic effects of expansionary fiscal policy. However, from Table 2.10 it is not possible to determine if the increase in equilibrium income is attributable to more output, higher prices, or some combination of the two. To make the determination and to introduce supply-side economics the concept of the aggregate supply curve is introduced.The aggregate supply curve shows the relationship between the price level (on the vertical axis) and the economy’s real output (on the horizontal axis) (see Figure 2.5 ). On the left-hand side of Figure 2.5 , the aggregate supply curve is horizontal up to full employment and then vertical. The shape of the curve reflects pricing decisions across the economy. Along the horizontal section of the aggregate supply curve, businesses respond to increases in aggregate demand by producing more output. They do not raise prices, perhaps a result of intense interfirm competition. The vertical portion of the curve occurs at full employment production. At full employment, more output cannot be produced. In response to increases in aggregate demand, businesses raise their prices. This section of the aggregate supply curve reflects demand-pull inflation: aggregate demand exceeds the economy’s ability to produce and leads to higher prices.Figure 2.5 Aggregate Supply CurvesThis formulation of the aggregate supply curve leads to an interesting conclusion. Unemployment is the result of too little aggregate demand, and inflation is the result of aggregate demand in excess of the economy’s ability to produce. With this aggregate supply curve, an economy experiences either inflation or unemployment, but not both at the same time.The aggregate supply curve on the right-hand side of Figure 2.5
eBook - ePubMacroeconomics
(With Study Guide CD-ROM)
- Jagdish Handa(Author)
- 2010(Publication Date)
- WSPC(Publisher)
automatic stabilizers in the economy.Fact Sheet 4.4 : USA Fiscal Deficit, 1962-20084.6.5 The commodity market and the price levelThis Fact Sheet illustrates movements in fiscal outlays, revenues and surpluses/deficits by using data for the USA. Before the 1970s, US governments generally followed the philosphy that, in peactime, governments should aim at a balanced budget. However, since about 1975, the USA has usually run a fiscal deficit, observable as periods when total government outlays surpass total revenues. Notable exceptions include the late 1990s when the economic boom of the period raised incomes and the resulting rise in tax revenues created a fiscal surplus. The recession that followed caused a sharp drop in incomes and tax revenues, with the result that the government budget fell into a deficit.After the financial crisis starting in 2007 turned into an economic recession, tax revenues fell while the US government pursued a fiscal stimulus policy, which created unprecedented peacetime budget deficits.Note that all the variables specified for the commodity market have been assumed to be in real terms and independent of the aggregate price level. In one-period analysis, this assumption means that consumers and firms are free of price illusion in their consumption and investment decisions. It is a convenient one in macroeconomic models and is often made.174.7 The Commodity Market Model: The IS Equation/CurveThe above arguments collectively specify our model for the commodity sector of the closed economy as:y = e equilibrium conditionThis model can be solved for y in terms of r, the policy variables and the various parameters in either of two ways:1. One method is to use the equilibrium condition s + t = i + g,
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