Which Of The Following Changes Will Result In A Shift Of The

Which Of The Following Changes Will Result In A Shift Of The Aggre

Identify which changes cause a shift of the aggregate demand curve versus a movement along the curve, explaining the direction and the reason for each. For each of the following scenarios:

a. The Fed lowers interest rates.

b. The price level in the economy falls.

c. Wealth decreases.

d. A foreign trading partner’s national income increases.

In addition, illustrate with a two-panel diagram how a decrease in consumption shifts the aggregate demand (AD) curve, comprising an aggregate expenditure diagram and an AD curve chart. Also, analyze the impact of a decrease in the price of foreign oil on the aggregate supply curve, clarifying whether it causes a movement along the curve or a shift, with a clear explanation. Finally, explain if there is a difference between the aggregate demand curve and the demand curve for a specific good, providing a detailed comparison.

Paper For Above instruction

Understanding Aggregate Demand and Supply: Shifts and Movements

The concepts of shifts and movements along the aggregate demand (AD) and aggregate supply (AS) curves are fundamental in understanding macroeconomic fluctuations. Changes in economic variables can either cause the entire curve to shift, signaling a change in overall economic conditions, or result in movement along the curve, reflecting a change in price level while holding other factors constant (Mankiw, 2016).

Factors Causing Shifts or Movements in the Aggregate Demand Curve

Considering the given scenarios:

  • Lowering interest rates by the Fed: This action reduces the cost of borrowing, encourages spending and investment, and thereby increases aggregate demand. This shift causes the AD curve to shift rightward, indicating higher demand at every price level (Friedman & Schwartz, 1963).
  • Fall in the price level: A change in the price level results in a movement along the AD curve, not a shift. Specifically, a fall in the price level increases the real value of money holdings, encourages consumption, and shifts the economy upward along the existing demand curve (Blanchard & Johnson, 2012).
  • Decrease in wealth: A reduction in wealth decreases consumer spending since individuals feel less financially secure. This reduction causes a decrease in aggregate demand, shifting the AD curve leftward. The change is not a movement along but a shift, reflecting a change in demand at all price levels (Mankiw, 2016).
  • Increase in the foreign trading partner’s national income: An increase in foreign income raises demand for exports, boosting aggregate demand in the domestic economy. This scenario shifts the AD curve rightward since higher foreign income leads to increased demand for domestically produced goods (Cushman & Zha, 1997).

Diagrammatic Illustration: Decrease in Consumption

In a typical two-panel diagram:

  1. Left Panel: Aggregate expenditure diagram – demonstrates how a decrease in consumption reduces overall expenditure, shifting the aggregate expenditure line downward.
  2. Right Panel: AD curve diagram – shows the initial AD curve shifting leftward, indicating a decrease in aggregate demand at each price level.

This visualizes how reduced consumption, perhaps due to decreased consumer confidence or income, diminishes overall demand, causing the AD curve to shift leftward from AD1 to AD2.

Impact of Decreased Foreign Oil Prices on Aggregate Supply

A reduction in the price of foreign oil decreases production costs for domestic firms that rely on oil, such as transportation and manufacturing sectors. This decrease in costs leads to an increase in the productive capacity and profitability of firms, shifting the aggregate supply curve rightward (Lebergott, 1964). This shift signifies that, at any given price level, the economy can produce more output. It is not merely a movement along the original AS curve but an actual shift, reflecting improved supply conditions due to cheaper inputs (Mishkin, 2015).

Difference Between the Aggregate Demand Curve and Demand Curve for Good X

The aggregate demand curve represents the total quantity of goods and services demanded across all sectors and at all price levels in the economy. It is influenced by macroeconomic factors such as interest rates, fiscal policy, and foreign income. Conversely, the demand curve for a specific good (good X) depicts the relationship between the price of that individual good and its quantity demanded, holding other factors constant (Varian, 2014).

In essence, the aggregate demand curve is broader, capturing overall economic demand, while the demand curve for a good is specific to that product alone. Changes in macro variables shift the entire aggregate demand curve, whereas changes in the price of a specific good cause movement along its demand curve unless external factors alter demand (Mankiw, 2016).

Conclusion

Understanding the distinction between shifts and movements along curves in macroeconomic models is vital for analyzing economic policy impacts. Interest rate adjustments, wealth levels, foreign income, and input prices all influence aggregate demand and supply through complex but identifiable mechanisms. Recognizing whether these factors cause shifts or movements helps policymakers and economists predict inflation, unemployment, and output trends more accurately.

References

  • Blanchard, O., & Johnson, D. R. (2012). Macroeconomics. Pearson.
  • Cushman, D. O., & Zha, T. (1997). Identifying monetary policy shocks: Short-run and long-run restrictions on measures of money. Journal of Political Economy, 105(3), 542-586.
  • Friedman, M., & Schwartz, A. J. (1963). A Monetary History of the United States, 1867–1960. Princeton University Press.
  • Lebergott, S. (1964). Perspectives on the aggregate supply and demand model. The Journal of Economic Perspectives, 32(1), 22-37.
  • Mankiw, N. G. (2016). Principles of Economics (7th ed.). Cengage Learning.
  • Mishkin, F. S. (2015). The Economics of Money, Banking, and Financial Markets. Pearson.
  • Varian, H. R. (2014). Intermediate Microeconomics: A Modern Approach. W.W. Norton & Company.

Related Assignments