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Think about aggregate demand What is aggregate demand? (2 points) What does aggregate demand imply about...

  1. Think about aggregate demand
    1. What is aggregate demand? (2 points)
  1. What does aggregate demand imply about the relationship between output and prices? (2 points)
  1. Explain one reason (“effect”) why aggregate demand demonstrates this relationship between output and prices (3 points).
  1. What may cause a rightward shift in the AD curve? (2 points)
  1. What may cause a leftward shift in the AD curve? (2 points)
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Answer #1

a) Aggregate demand is a curve showing the inverse relationship between price level in an economy and the aggregate output demanded. b) It implies a negative and inverse relationship between output and prices in the economy c) One major effect explaining this relationship is: Wealth effect Reason: The wealth effect states that change in prices makes a consumer relatively either well off or worse off. This in turn changes his demand for goods accordingly and thus shapes up the AD curve d) An increase in income of consumers would increase the demand of goods and services by them and thus shift the AD curve out to the right e) A decrease in income of consumers or a change in taste of consumers would move the AD curve to the left, as demand for goods and services would fall.

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