Assignment 3 Explain what happens to aggregate demand AD in

Assignment #3: Explain what happens to aggregate demand (AD) in each of the following cases: Instructions: Just state whether aggregate demand will shift left, shift right, or remain unchanged. State the reason(s) for your answer. a) The interest rate rises b) Wealth falls c) The dollar depreciates relative to foreign currency d) Households expect lower prices in the future e) Business taxes rise

Solution

a) With the increase in interest rates, the money supply would decrease which decreases investment and reduces economic growth thereby decreasing aggregate demand and hence the AD curve shifts to left.
b) When wealth falls the purchasing power or disposable income falls which reduces AD and hence it shifts the AD curve to left
c) When the dollar depreciates the value of dollar decreases which promotes exports and hence the income increases which increases AD and shifts the AD curve to right
d) With the expectation of lower prices, people would increase consumption which increase AD and hence AD shifts to right
e) With the increase in business taxes, it reduces investment and hence the output produced reduces which increases the price of the good, thereby reducing consumption and hence it shifts the AD curve to left.