Question

There is a difference between a change in the quantity demanded of Real GDP and a change in aggregate demand. 

a. Explain the differences between a change in the quantity demanded of Real GDP and a change in aggregate demand. 

b. Graphically evaluate the difference between an increase in the quantity demanded of Real GDP and an increase in aggregate demand.

c. List TWO (2) changes that would shift the AD curve rightward. 

d. List TWO (2) the changes that would shift the AD curve leftward.  

Answer 1

a) A change in the quantity demanded of real GDP results when there is a change in the general price level. Other factors affecting the quantity demanded of real GDP remains unchanged. In contrast, a change in aggregate demand is the change in the quantity demanded of real GDP when general price level is unchanged and there are changes in other factors. While a change in the quantity demanded of real GDP causes movement along the aggregate demand curve, a change in aggregate demand brings a shift in aggregate demand curve

b) As mentioned, a change in the quantity demanded of real GDP causes movement along the aggregate demand curve. Thus, when the general price level falls, there is a downward movement along the AD curve and for a price increase, there is an upward movement. When there is a increase in aggregate demand, there is a rightward shift in the aggregate demand curve and when there is a decrease in aggregate demand, there is a leftward shift in the aggregate demand curve

c) Rightward shift in the AD curve is brought about by an increase in government spending and a decrease in taxes.

d) Leftward shift in the AD curve is brought about by business pessimism that reduces investment spending and a decrease in money supply that discourages aggregate spending.