The following graph shows an increase in aggregate demand (AD) in a hypothetical country. Specifically, aggregate demand shifts to the right fromAD1 to AD2, causing the quantity of output demanded to rise at all price levels. For example, at a price level of 140, output is now $400 billion,where previously it was $300 billion.170160150140-130AD2120110AD,10090100200300400500600700800OUTPUT (Billions of dollars)The following table lists several determinants of aggregate demand.Complete the table by indicating the change in each determinant necessary to increase aggregate demand.Change Needed to Increase ADWealthTaxesInterest ratesThe value of the domestic currency relative to the foreign currencyPRICE LEVEL

The aggregate demand curve of an economy is the vertical summation of all individual demand curves. It is a vital component of the Keynesian macroeconomic model as the interaction of aggregate demand with aggregate supply establishes the price and output level of the economy.The level of aggregate demand can be influenced by expansionary fiscal and monetary actions that are discretionary in nature. A reduction in aggregate demand affects the level of business activity and thwarts the economy into a recession, leading to unemployment. The loss of efficiency is mitigated via expansionary actions that restore the actual output of the economy to the level of potential output.Fiscal expansionary actions include a reduction in the tax rate or an increase in government spending. Monetary expansionary actions include an increase in the money supply via open market operations or a reduction in the discount rate, federal funds rate, or reserve requirement ratio. Change Needed to Increase ADWealthIncreaseTaxesDecreaseInterest RatesDecreaseThe value of the domestic currency relative to the foreign currencyDecreaseAn increase in wealth will lead to an increase in aggregate demand as consumers will experience an expansion of their purchasing power.A decrease in taxes will lead to an increase in aggregate demand as the reduction will increase the disposable income of consumers, increasing their purchasing power.A decrease in interest rates will disincentivize savings and therefore, consumers will increase their level of consumption. At the same time, the reduced cost of borrowing will incentivize investments that will increase the level of economic activity, and subsequently, employment, which will cause an increase in aggregate demand.A decrease in the value of the domestic currency relative to the foreign currency will reduce the relative price of domestic goods compared to foreign goods, leading to an increase in their demand. Net exports in the economy will increase, which will enhance the level of aggregate demand.Change Needed to Increase ADWealthIncreaseTaxesDecreaseInterest RatesDecreaseThe value of the domestic currency relative to the foreign currencyDecrease

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The following table lists several determinants of aggregate demand. Complete the table by indicating the change in each determinant necessary to increase aggregate demand. Change Needed to Increase AD Wealth Тахes Interest rates The value of the domestic currency relative to the foreign currency

The following table lists several determinants of aggregate demand. Complete the table by indicating the change in each determinant necessary to increase aggregate demand. Change Needed to Increase AD Wealth Тахes Interest rates The value of the domestic currency relative to the foreign currency

ENGR.ECONOMIC ANALYSIS

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ISBN:9780190931919

Author:NEWNAN

Publisher:NEWNAN

Chapter1: Making Economics Decisions

Section: Chapter Questions

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Question

The following graph shows an increase in aggregate demand (AD) in a hypothetical country. Specifically, aggregate demand shifts to the right from
AD1 to AD2, causing the quantity of output demanded to rise at all price levels. For example, at a price level of 140, output is now $400 billion,
where previously it was $300 billion.
170
160
150
140
-
130
AD2
120
110
AD,
100
90
100
200
300
400
500
600
700
800
OUTPUT (Billions of dollars)
The following table lists several determinants of aggregate demand.
Complete the table by indicating the change in each determinant necessary to increase aggregate demand.
Change Needed to Increase AD
Wealth
Taxes
Interest rates
The value of the domestic currency relative to the foreign currency
PRICE LEVEL

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