aq11F - right e Rapid growth in GDP in Canada and Mexico...

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11 Feb 03 Which of the following would increase [shift to the right] AD [Aggregate Demand]? a. A switch of expenditure from defense to investment b. A switch of expenditure from investment to defense Neither of these. AD = Y = C + I + G + (X – M), so the switch just moves expenditure from G to I or vice versa, does not change the total. c. An increase in the labor force from people retiring later The immediate and obvious effect of this is on LAS and SAS, shifting both to the right. But, it should also increase incomes and therefore Consumption expenditure, so it is acceptable. d. A reduction in the value of the US $ in terms of foreign currency Make it concrete; if the US$ was previously worth 1.60 Canadian, now it is only worth say 1.50 Canadian. So Canadian goods are more expensive for US residents, US goods cheaper for Canadians. Imports M get smaller, exports X increase, so AD does shift
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Unformatted text preview: right. e. Rapid growth in GDP in Canada and Mexico Canadians and Mexicans have higher incomes, US exports X increase, AD shifts right. f. A fall in long term interest rates It becomes cheaper to borrow, there is more expenditure on Investment I and consumer durables, AD shifts right. g. A rise in long term interest rates. The opposite; NO h. A smaller government budget deficit. The deficit is (G – T); if that is smaller, either G is smaller or T is bigger. If G is smaller, AD has decreased. If T is bigger, disposable income [income after taxes] is smaller, so consumption expenditure C will be smaller, AD has decreased. NO. i. Expectations that investment and government purchases will increase soon. This implies AD will increase soon, so expectations will be of higher income soon, so consumption and investment will tend to increase now, AD shifts right....
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