Question

 The following graph shows an increase in aggregate demand (AD) in a hypothetical country. Specifically, aggregate demand shifts to the right from AD₁ to AD₂, causing the quantity of output demanded to rise at all price levels. For example, at a price level of 140, output is now $400 billion, where previously it was $300 billion.

 The following table lists several determinants of aggregate demand.

 Complete the table by indicating the change in each determinant necessary to increase aggregate demand.

Answer 1

Determinant - Wealth

Wealth determines the purchasing power of a household and thus impacts its consumption expenditure.

An increase in wealth leads to increase in consumption.

Consumption is a component of aggregate demand.

So, increase in consumption leads to the increase in the aggregate demand.

Thus,

An increase in wealth leads to increase in AD.

Determinant - Taxes

Taxes impacts consumption expenditure.

A decrease in taxes leads to increase in disposable income which in result boosts the consumption.

Consumption is a component of aggregate demand.

An increase in consumption leads to increase in aggregate demand.

Thus,

A decrease in taxes leads to an increase in AD.

Determinant - Expected rate of return on investment

An increase in the expected rate of return on investment induces the firm to increase their investment spending.

Investment spending is a component of aggregate demand.

So, an increase in the investment spending leads to an increase in aggregate demand.

Thus,

An increase in the expected rate of return on investment leads to an increase in AD.

Determinant - Income in other countries

An increase in the income in other countries will prompt them to increase their imports.

This will enable the given country to increase its exports to other countries.

So, exports to other countries will increase.

This will lead to an increase in net exports.

Net exports is a component of aggregate demand.

So, an increase in net exports will lead to an increase in aggregate demand.

Thus,

An increase in the income in other countries will lead to an increase in AD.

Following is the complete table -

	Change needed to increase AD
Wealth	Increase
Taxes	Decrease
Expected rate of return in investment	Increase
Incomes in other countries	Increase

Answer 2

increase, decrease, decrease, depreciate

Answer 3