Please answer all!! Attempts: 03 0 Average: 0.1/1 4. Determinants of aggregate d

Question

Please answer all!!

Attempts: 03 0 Average: 0.1/1 4. Determinants of aggregate demand The following graph shows a decrease in aggregate demand (AD) in a hypothetical country. Specinically, aggregate demand shifts to the left from ADi to AD causing the quantity of output demanded to fall at all price levels. Far example, ata price level of 140, output is now $200 billian, where previously it was s300 biion 170 160 150 140-+ 130 120 110 AD1 100 90 00 200 300 400 00 600 700 900 OUTPUT (Bilions of dollara) The follawing table liets several determinants of aggregate demand. Complete the table by indicating the change in each determinant necessary to decrease aggregate demand Change Needed to Decrease Ad Consumer expectations about future profitability The value of the domestic currency relative to the foreign currency

Explanation / Answer

Four main components of aggregate demand are as follows -

1. Consumer Spending

2. Government Spending

3. Investment

4. Net Exports

Consumer expectations about future profitability -

Consumer expectations about future profitability impacts consumer spending which in result impacts aggregate demand. If there is decrease in consumer expectations about future profitability then this will induce consumers to decrease their current spending as they will be uncertain about future income and want to save more now. This will result in decrease in aggregate demand.

Government Spending

Government spending is a component of aggregate demand. It is directly related to aggregate demand.

So, a decrease in government spending will bring a decrease in aggregate demand.

Interest rates

Interest rates tends to impact consumption and investment spending. An increase in interest rate raises the cost of borrowing and thus reduce the consumption and investment spending backed by credit. This, in result, leads to decrease in aggregate demand.

The value of the domestic currency relative to foriegn currency

If value of the domestic currency increases relative to the foriegn currency then this will make the exports expensive and imports cheaper leading to fall in exports and rise in imports which in result leads to decrease in aggregate demand.

Following is the complete table -

Change needed to decrease AD Consumer expectations about future profitability Decrease Government Spending Decrease Interest rates Increase The value of the domestic currency relative to the foriegn currency Increase

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