Question

For this scenario dealing with aggregate demand, does it cause a movement along the curve or a shift in the curve? Explain your response each time

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

Answer 1

Positive economic news leading to strong future economic growth expectations causes a rightward shift in the aggregate demand curve, increasing real GDP and the price level, with the magnitude depending on the shape of the aggregate supply curve.

Step-by-step explanation:

When consumers read positive economic news and then expect strong future economic growth, this scenario relates to changes in the aggregate demand (AD) curve. In this case, the effect is a shift of the AD curve to the right, not just a movement along the curve.

This expectation of economic growth stimulates consumer confidence and increases the likelihood of higher consumer spending and investment, leading to an increase in aggregate demand, which, as explained in the Keynesian Perspective, would result in a higher real GDP and upward pressure on the price level. It is important to note that the magnitude of these changes and their relation to potential GDP depends on whether the shift in the AD curve occurs along the flatter or steeper portion of the aggregate supply (AS) curve.