ECONOMICS (CBSE/UGC NET)

Detailed explanation-1: -If the AD curve shifts to the left, then the equilibrium quantity of output and the price level will fall. Whether equilibrium output changes relatively more than the price level or whether the price level changes relatively more than output is determined by where the AD curve intersects with the AS curve.

Detailed explanation-2: -Therefore, higher interest rates will tend to reduce consumer spending and investment. This will lead to a fall in Aggregate Demand (AD). If we get lower AD, then it will tend to cause: Lower economic growth (even negative growth – recession)

Detailed explanation-3: -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. Consumers may decide to spend less and save more if they expect prices to rise in the future.

Detailed explanation-4: -As the real exchange rate rises, the dollar becomes stronger, causing imports to rise and exports to fall. Thus, policies that raise the real exchange rate though the interest rate will cause net exports to fall and the aggregate demand curve to shift left.

Detailed explanation-5: -A change in interest rates that results from a change in the price level affects investment in a way that is already captured in the downward slope of the aggregate demand curve; it causes a movement along the curve. A change in interest rates for some other reason shifts the curve.