Answer to Question #204359 in Economics for alex

Question

One of the challenges in applying the aggregate demand– aggregate supply model is distinguishing shifts in aggregate demand from movements along the aggregate demand curve. Here we present four scenarios.

 

Question: Does each scenario below cause a movement along the curve or a shift in the curve? Explain your response each time.

 

1.      Consumers read positive economic news and then expect strong future economic growth.

2.      Due to an increase in the price level in the United States, consumers substitute clothes made in the United States and into clothes made in Nicaragua.

3.      Several European economies go into recession.

4.      A decrease in the price level leads to greater real wealth and more savings, which reduces the interest rate and increases investment.

Answer 1

1. Consumers read positive economic news and then expect strong future economic growth - the aggregate demand will increase and the aggregate demand curve will shift rightwards.

2. Due to an increase in the price level in the United States, consumers substitute clothes made in the United States and into clothes made in Nicaragua - there is an upward movement along the aggregate demand curve.

3. Several European economies go into recession - there is an upward movement along the aggregate demand curve, because the aggregate supply will decrease.

4. A decrease in the price level leads to greater real wealth and more savings, which reduces the interest rate and increases investment - there is a downward movement along the aggregate demand curve.