Explain the effect, if any, that each of the following occurrences should have o

Question

Explain the effect, if any, that each of the following occurrences should have on the aggregate demand curve.

a.The Fed lowers the discount rate. b.The price level decreases. c.The federal government increases the federal income tax rates in an effort to reduce the federal deficit. d.Pessimistic firms decrease investment spending. e.The federal government increases purchases to stimulate the economy. Explain the effect, if any, that each of the following occurrences should have on the aggregate demand curve.

a.The Fed lowers the discount rate. b.The price level decreases. c.The federal government increases the federal income tax rates in an effort to reduce the federal deficit. d.Pessimistic firms decrease investment spending. e.The federal government increases purchases to stimulate the economy.

Explanation / Answer

a.The Fed lowers the discount rate.

Due to decreased future returns, current consumption increases, aggregate demand curve shifts to the right

b.The price level decreases.

Demand increases, moves to a lower point on the demand curve.

c.The federal government increases the federal income tax rates in an effort to reduce the federal deficit.

Less disposable income with the consumers, demand curve shifts to the right.

d.Pessimistic firms decrease investment spending.

Decrease in the demand, leftward shift of the aggregate demand curve

e.The federal government increases purchases to stimulate the economy.

The aggregate demand curve shifts to the right.

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