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Shift Factors of Aggregate Demand

Aggregate Demand can increase or decrease depending on several things. In effect, these things will cause shifts up or down in the AD curve. These include:

  • Exchange Rates: When a country's exchange rate increases, then net exports will decrease and aggregate expenditure will go down at all prices. This means that AD will decrease.
  • Distribution of Income: This is directly related to wages and profits. When worker's real wages increase, then people will have more money on their hands because their overall income has increased. When this happens they tend to consume more causing the consumption expenditures to increase.
  • Expectations: Consumers tend to have certain expectations about the future of the economy and will adjust their spending accordingly. If they would expect the economy to not do so well in the future, saving would increase thus decrease overall expenditures. Rising price levels will cause aggregate demand to increase. If consumers foresee the price level to rise in the near future, they might just go out and buy that good now, increasing the consumption expenditures in AD. Many different expectations have the capacity to increase or decrease aggregate demand and it is not always clear as to how this will happen.
  • Foreign Income: This relates U.S. economic output with the income of its trading partners in the world. When foreign income rises, U.S. exports will increase causing aggregate demand to increase.
  • Monetary and Fiscal Policies:  The government has some ability to impact AD. They can spend money or increase taxes in order to influence how consumers spend or save. An expansionary fiscal policy causes AD to increase, while a contractionary monetary policy causes AD to decrease.

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