The following graph illustrates a shift of the aggregate demand curve to the left. It can be caused by:
Question
The following graph illustrates a shift of the aggregate demand curve to the left. It can be caused by:
Solution
A shift of the aggregate demand curve to the left can be caused by several factors:
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Decrease in Consumer Confidence: If consumers expect the economy to perform poorly in the future, they may decide to save more and spend less, leading to a decrease in aggregate demand.
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Increase in Interest Rates: When interest rates increase, the cost of borrowing rises. This discourages businesses from investing and consumers from taking out loans to finance big-ticket purchases, leading to a decrease in aggregate demand.
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Decrease in Government Spending: If the government decides to cut spending, this directly decreases aggregate demand.
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Decrease in Net Exports: If a country's exports decrease or its imports increase, net exports decrease. This leads to a decrease in aggregate demand.
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Increase in Taxes: An increase in taxes reduces consumers' disposable income, leading to a decrease in consumer spending and thus a decrease in aggregate demand.
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Decrease in Money Supply: If the central bank decides to decrease the money supply, this leads to an increase in interest rates, which can decrease aggregate demand.
Remember, any factor that causes a decrease in consumption, investment, government spending, or net exports can cause the aggregate demand curve to shift to the left.
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