Aa Aa 4. Determinants of aggregate demand The following graph shows an increase

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Aa Aa 4. Determinants of aggregate demand The following graph shows an increase in aggregate demand (AD) in a hypothetical country. Specifically, aggregate demand shifts to the right from AD1 to AD2, causing the quantity of output demanded at a price level of 130 to rise from $400 billion to $600 billion. PRICE LEVEL 170 160 150 AD1 140 130 120 110 100 AD 90 0 100 200 300 400 500 600 700 800 QUANTITY OF OUTPUT (Billions of dollars) The following table lists several determinants of aggregate demand. Complete the table by indicating the change in each determinant necessary to increase aggregate demand Determinant Change Needed to Increase AD Wealth Government spending Expected rate of return on investment Increase Incomes in other countries

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Table showing the changes in each determinant necessary to increase aggregate demand.

Determinant Change needed to increase AD    Explanation Wealth Increase The increase in the wealth will increase the consumption and this will increase the aggregate demand. Government Spending Increase When government spending is increased aggregate demand increases and thus shifting to the aggregate demand curve to the right. Expected rate of return on investment Increase The expected return is dependent on many factors and an increase in the expected return has positive effect on investment which will increase income and consumption. This will shift the aggregate demand curve to right.   Incomes in other countries Increase This will increase the demand for exported goods and will also cause the aggregate demand curve to shift right as net exports rises.

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