The following graph shows an increase in aggregate demand (AD) in a hypothetical
ID: 1204470 • Letter: T
Question
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.
Complete the table by indicating the change in each determinant necessary to increase aggregate demand.
The value of the domestic currency relative to the foreign currency appreciate or depreciate
Consumer expectations Improve or worsen Government spending Increase or decrease Interest rates Increase or decreaseThe value of the domestic currency relative to the foreign currency appreciate or depreciate
Explanation / Answer
Consumer expectation will have high for the future growth and then AD curve shifts to right
Government spending – the government will increases spending, AD = C + I+ G + NX since G increases AD will shift to right
Expected rate of return – lowers interest rate
The value of the domestic currency relative to the foreign currency appreciates or depreciate- weaker currency
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