Answer to Question #125798 in Macroeconomics for Okoro

Question

Explain 5 factors that can shift the Aggregate Demand (AD) curve
Given the statistics for a small economy called Abua below, derive the GDP deflator and
assert if there is evidence of inflation or otherwise.
Real GDP = $650 million
Nominal GDP = $400 million
Inflation rate = 9%
Unemployment rate = 15%

Answer 1

Shifts in aggregate demand curve is caused by changes in any of the components of AD. Changes in the price level does not affect the shift the AD curve. Since gross domestic and AD are linked, when the aggregate demand decreases, GDP also decreases, and when aggregate demand increases, GDP increases.

When consumption expenditure decreases, the AD curve will shift to the left. For example changes in government tax policies can impact consumption expenditure.

When high taxes are taxed on individuals, they spend less, which results to the shifting of AD curve to shift to the left this results to consumers’ after-tax income decreasing, and the result is that the consumers tend to spend less on goods and services.

A decrease in personal income taxes would increase consumption expenditure, which shifts the AD curve to the right this results to consumers’ after-tax income increasing, and they tend to spend a section of this increase on goods and services.

Investment expenditure. Increase in investment expenditure increases, the AD curve to shift to the right. Decrease in investment expenditure shifts the AD curve to shift to the left.

Government expenditure. Increase in government expenditure results to the AD curve to shift to the right but when government expenditure decreases, the AD curve will shift to the left.

Net exports .For instance, net exports will only change when foreign incomes rise or fall. Rise in foreign incomes will make the consumers in the foreign countries to increase their consumption expenditure on all goods and services. A decrease in foreign incomes would have the opposite effect.

2) $\text{GDP Deflector}=$ $\frac{Nominal GDP}{Real GDP}$ $×$ $100$

$=\frac{400}{650}×100$ $=61.538$

There is no inflation

The GDP Deflector of 61 percent means the aggregate level of prices reduced by 39 percent from the base year to the current year.