Consumer Expectations Improve or Worsen Government Spending

The following graph shows a decrease in aggregate demand (AD) in a hypothetical country, Specifically, aggregate demand shifts to the left from to AD2, causing the quantity of output demanded to fall at all price levels. For example, at a price level of 140, output is now $200 billion, where previously it was $300 billion. 0 170 160 150 140+ 130 120 110t AD1 100 90 100 200 300 400 500 600 700 800 REAL GOP (Bilions of dollars) The following table lists several determinants of aggregate demand

Solution

From the graph observe that aggregate demand has shifted to the left. AD is composed of C, I, G and NX. AD is also affected by expectations about the market and what happens in other nations

For AD shifts to the left, we must expect that

Consumer Expectations should Worsen

Government Spending should Decrease

Interest Rates should Increase

Incomes in Other countries Decrease

While income in other countries is responsible for influencing AD because foreigners buy domestic goods, a fall in their income reduces exports so AD shifts down. Increase in interest rate reduce consumption and investment as well as appreciates currency and reduces net exports.