Chapter 17, Problem 1FRQ

a)

To determine

The question requires us to draw a graph representing aggregate demand.

Explanation of Solution

The following graph represents the aggregate demand curve in an economy:

  

In the above graph, the x-axis represents the value of real GDP while the y-axis shows the price level. The downward-sloping line AD shows the aggregate demand curve in an economy.

Economics Concept Introduction

The aggregate demand curve represents the relationship between the price level and aggregate quantity demanded by households, firms, the government, and foreign nations.

b)

To determine

The question requires us to draw a graph representing an increase in aggregate demand.

Explanation of Solution

The following graph represents an increase in the aggregate demand:

  

In the above graph, the x-axis represents the value of real GDP while the y-axis shows the price level. The downward-sloping line AD shows the aggregate demand curve in an economy. When aggregate demand increases, it causes the aggregate demand curve to shift to the right from AD1 to AD2 and results in a higher price level and higher real GDP in an economy.

c)

To determine

The question requires us to list the four factors that shift the aggregate demand.

Explanation of Solution

The list of four factors that shift the aggregate demand curve is the following:

1. Changes in expectations
2. Changes in wealth
3. Change in the size of the existing stock of physical capital
4. Change in government policies and aggregate demand.

d)

To determine

The question requires us to determine the change in aggregate demand.

Explanation of Solution

The factors that change the aggregate demand curve are the following:

1. Changes in expectations: the optimistic expectations of consumers and firms lead to a higher aggregate demand while pessimistic expectations lower the level of aggregate demand in an economy.<
2. Changes in wealth: an increase in the level of wealth increases the aggregate demand in an economy while a lower level of wealth decreases the aggregate demand. <
3. Change in the size of the existing stock of physical capital: an increase in the size of physical capital represents the higher investment in the market that reflects the higher aggregate demand. A fall in the size of existing physical capital leads to lower aggregate demand in an economy.<
4. Change in government policies and aggregate demand: an expansionary fiscal policy causes the aggregate demand to rise while a contractionary fiscal policy reduces the level of aggregate demand in an economy.