Explain in detail how and why would the aggregate demand curve shift in response

Question

Explain in detail how and why would the aggregate demand curve shift in response to following changes:

a. An increase in personal taxes.

b. An increase in expected profits and business confidence.

c. A decrease in level of foreign GDP or real income.

d. A decrease in nominal money supply by the Federal Reserve.

e. Due to a war a law passes in Congress allowing drafting of all males and females between ages of 18 and 35.

f. A free immigration day is declared allowing 10 million immigrants passing the border within that day. All of them get the jobs of 10 million Americans in farming, leaving 10 million unemployed Americans

Explanation / Answer

(a) An increase in personal taxes will decrease disposable income, reducing personal consumption expenditure. Lower consumption demand will decrease aggregate demand, shifting AD curve left.

(b) Increase in expected profit and business confidence will increase investment demand by firms. Higher investment demand will increase aggregate demand, shifting AD curve right.

(c) Decrease in foreign GDP will lower import demand by foreign country, which will lower export demand of the country in question. Lower exports will reduce net exports (= Export - Import). Lower net exports will decrease aggregate demand, shifting AD curve left.

(d) Decrease in nominal money supply will increase interest rate, which will dampen consumption and investment demand. Lower consumption and investment will decrease aggregate demand, shifting AD curve left.

NOTE: As per Chegg answering guidelines, first 4 parts are answered.

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