Answer to Question #314090 in Macroeconomics for kezia

Question

 Defi ne carefully the difference between movements along the AD curve and shifts of the AD curve. Explain why an increase in potential output would shift out the AS curve and lead to a movement along the AD curve. Explain why a tax cut would shift the AD curve outward (increase aggregate demand). 

Answer 1

demand is the willingness and ability to purchase a good or a service at the prevailing market price.

movement along the demand curve is the increase(up movement) or decrease (down movement) of quantity demanded due to changes of prices only which they inversely relate while shift of demand curve is movement of demand curve either to left (demand decrease) or right (demand increase) from original point caused by other factors apart from price changes.

When the output increases(production increase) the supply (AS) curve shift out indicating increased supply of goods and also leading to upward movement along demand (AD) curve indicating increase in demand-when there is an increase in supply,the prices of such goods fall and thus leading to increased demand.

A tax cut will lead to increased disposable income by the consumers anabling them to have increased bargaining power and thus leading to increased demand which shift the demand (AC) curve outward( right shift).