Question

The following table lists several determinants of aggregate demand 14. Determinants of aggregate demand 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. 170 180 150 140 PRICE LEVEL 130 120 AD2 110 AD1 100 0 100 200 300 400 500 600 700 800 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

Answer 1

To increase aggregate demand (AD), the necessary changes in determinants are as follows:

Wealth: Increase in wealth

Taxes: Decrease in taxes

Interest rates: Decrease in interest rates

Value of the domestic currency relative to the foreign currency: Decrease in the value of the domestic currency relative to the foreign currency (depreciation)

Step-by-step explanation:

An increase in aggregate demand, as depicted by the shift from AD1 to AD2 in the graph, necessitates specific changes in determinants to drive this upward shift. Firstly, an increase in wealth encourages higher consumer spending, leading to an increase in aggregate demand. Secondly, a decrease in taxes puts more disposable income in the hands of consumers, stimulating spending and boosting aggregate demand. Thirdly, a decrease in interest rates encourages borrowing and investment, further fueling consumer and business spending, thereby increasing aggregate demand.

Additionally, a decrease in the value of the domestic currency relative to the foreign currency, known as depreciation, can also boost aggregate demand. Depreciation makes domestic goods cheaper for foreign buyers, increasing exports, and simultaneously making foreign goods more expensive for domestic consumers, encouraging domestic consumption of local goods, both of which contribute to higher aggregate demand.

These changes in determinants work in tandem to foster an environment conducive to higher spending, investment, and consumption, collectively leading to an increase in aggregate demand as observed in the shift from AD1 to AD2 in the graph. Adjusting these determinants positively influences consumer behavior and economic activities, resulting in an upward shift in the aggregate demand curve.

Answer 2

To increase aggregate demand, wealth must increase, taxes and interest rates should decrease, and the domestic currency should depreciate against foreign currencies.

Step-by-step explanation:

To complete the table by indicating the change in each determinant necessary to increase aggregate demand (AD):

• Wealth would need to increase, since higher wealth leads to more consumptive spending.
• Taxes would need to decrease, which typically results in more disposable income, encouraging consumption and investment.
• Interest rates would need to decrease, making loans more affordable, which stimulates investment and big-ticket consumption like housing and cars.
• The value of the domestic currency relative to the foreign currency would need to decrease (depreciation), making exports cheaper and imports more expensive, which could increase net exports.

These factors influence the various components of aggregate demand, such as consumption spending (C), investment spending (I), government spending (G), and spending on exports (X) minus imports (M), all of which are part of the equation C + I + G + X - M. A rightward shift in the AD curve, like moving from AD1 to AD2, suggests that one or more of these factors have changed to stimulate an increase in total spending across all price levels.