Aggregate Demand Shifts

Aggregate Demand Shifts - Shifts in the AD curve A change...

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Shifts in the AD curve A change in factors affecting any one or more components of aggregate demand i.e. households (C), firms (I), the government (G) or overseas consumers and business (X) changes planned aggregate demand and results in a shift in the AD curve. Consider the diagram below which shows an inward shift of AD from AD1 to AD3 and an outward shift of AD from AD1 to AD2. The increase in AD might have been caused for example by a fall in interest rates or an increase in consumers’ wealth because of rising house prices. AD1 P1 AD2 P2 AD3 In the short run, shifts in aggregate demand cause fluctuations in the economy’s output of goods and services. In the long run, shifts in aggregate demand affect the overall price level but do not affect output. P3 Inflation Y3 Y2 Real National Income Y1
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Causes of Shifts in Aggregate Demand Factors causing a shift in AD Changes in Expectations Current spending is affected by anticipated future income, profit, and inflation The expectations
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