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April 11, 2021 

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AGGREGATE DEMAND SHIFTS:

Changes in the aggregate demand determinants cause the aggregate demand curve to shift. The mechanism is comparable to that for market demand determinants and market demand. There are two alternatives--an increase in aggregate demand and a decrease in aggregate demand. An increase in spending by any of the four sectors--household, business, government, and foreign--shifts the aggregate demand curve to right. A decrease in spending by these four sectors shifts the aggregate demand curve to left.
Shifting the Curve
Shifting the Curve

To see how this works, consider the aggregate demand curve presented in the exhibit to the right. It is a standard negatively-sloped aggregate demand curve that captures the specific one-to-one relationship between the price level and aggregate expenditures. The assorted ceteris paribus factors, that is, the aggregate demand determinants, are assumed to remain constant with the construction of the curve.

Analogous to other determinants, aggregate demand determinants shift the aggregate demand curve. A change in any of the determinants can either increase or decrease the aggregate demand curve.

  • An increase in aggregate demand is illustrated by a rightward shift in the aggregate demand curve. Click the [Increase in AD] button for a demonstration. What does it mean to have an increase in demand? It means that for every price level, the four sectors have an increase in aggregate expenditures on real production.

  • A decrease in aggregate demand is illustrated by a leftward shift. Click the [Decrease in AD] button for a demonstration. What does it mean to have a decrease in demand? It means that for every price level, the four sectors have a decrease in aggregate expenditures on real production.
Shifts of the aggregate demand curve are often the source of disequilibrium in the aggregate market. Such disequilibrium then induces changes in the price level as the economy seeks to eliminate the disequilibrium. The key is that aggregate demand determinants CAUSE shifts of the aggregate demand curve which CAUSE disequilibrium which then CAUSES changes in the price level.

This suggests an important difference between two related changes--a change in aggregate demand and a change in aggregate expenditures.

  • A change in aggregate demand is any shift of the aggregate demand curve. With this change, the entire curve shifts to a new location. A change in aggregate demand is caused by a change in the aggregate demand determinants. This is comparable to a change in demand in the analysis of the market.

  • A change in aggregate expenditures is a movement along a given aggregate demand curve. This change involves the movement from one point on the existing curve to another point on the SAME curve. The curve does not move. A change in aggregate expenditures is caused by a change in the price level, and ONLY a change in the price level! This is comparable to a change in quantity demanded in the analysis of the market.

<= AGGREGATE DEMAND INCREASE, SHORT-RUN AGGREGATE MARKETAGGREGATE EXPENDITURES =>


Recommended Citation:

AGGREGATE DEMAND SHIFTS, AmosWEB Encyclonomic WEB*pedia, http://www.AmosWEB.com, AmosWEB LLC, 2000-2021. [Accessed: April 11, 2021].


Check Out These Related Terms...

     | change in aggregate demand | change in aggregate expenditures | slope, aggregate demand curve | interest rate, aggregate demand determinant | federal deficit, aggregate demand determinant | inflationary expectations, aggregate demand determinant | money supply, aggregate demand determinant | consumer confidence, aggregate demand determinant | exchange rates, aggregate demand determinant | physical wealth, aggregate demand determinant | financial wealth, aggregate demand determinant |


Or For A Little Background...

     | aggregate demand | aggregate expenditures | aggregate demand determinants | aggregate demand and market demand | gross domestic product | consumption expenditures | investment expenditures | government purchases | net exports | price level | real production | GDP price deflator | real gross domestic product |


And For Further Study...

     | AS-AD analysis | aggregate market | business cycles | circular flow | Keynesian economics | monetary economics | personal consumption expenditures | gross private domestic investment | government consumption expenditures and gross investment | net exports of goods and services | aggregate supply determinants |


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