ECONOMICS
AGGREGATE DEMAND
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Question
[CLICK ON ANY CHOICE TO KNOW THE RIGHT ANSWER]
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leftward by $40 billion at each price level.
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rightward by $20 billion at each price level.
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rightward by $40 billion at each price level.
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leftward by $20 billion at each price level.
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Detailed explanation-1: -If investment decreases by $20 billion and the economy’s MPC is 0.5, the aggregate demand curve will shift: leftward by $40 billion at each price level.
Detailed explanation-2: -A reduction in investment would shift the aggregate demand curve to the left by an amount equal to the multiplier times the change in investment.
Detailed explanation-3: -When the price level falls, consumers are wealthier, a condition which induces more consumer spending. Thus, a drop in the price level induces consumers to spend more, thereby increasing the aggregate demand. The second reason for the downward slope of the aggregate demand curve is Keynes’s interest-rate effect.
Detailed explanation-4: -The aggregate demand curve tends to shift to the left when total consumer spending declines. 2 Consumers might spend less because the cost of living is rising or because government taxes have increased.
Detailed explanation-5: -Change in MPC An increase in the marginal propensity to consume creates a steeper aggregate demand curve. The point of origin is the same, but steeper line crosses the equilibrium line at a higher point. This results in larger equilibrium values for aggregate demand and national income.