There are many actions that will cause the aggregate demand curve to shift. When the aggregate demand curve shifts to the left, the total quantity of goods and services demanded at any given price level falls. This can be thought of as the economy contracting. To understand what causes the economy to contract, let's start with the basic equation for the demand curve. Recall that the price level is not directly in the equation for aggregate demand. Rather, it is implicit in each of the terms in the equation. We know that aggregate demand is comprised of C(Y - T) + I(r) + G + NX(e) = Y. Thus, a decrease in any one of these terms will lead to a shift in the aggregate demand curve to the left. The first term that will lead to a shift in the aggregate demand curve is C(Y - T). This term states that consumption is a function of disposable income. If disposable income
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This note was uploaded on 12/13/2011 for the course ECO 1310 taught by Professor Staff during the Fall '10 term at Texas State.