Shifts in the AD curve
- If households and firms become more optimistic about economic prosoects, consumer expenditure and investment will increase, thereby shifting the AD curve to the right.
- A cut in income tax would raise real disposable income and so would again probably increase consumption and investment.
- A rise in the interest rate, independent of a change in the price level would reduce consumption and investment.
- A fall in the exchange rate would be likely to increase AD as a result of increasing net exports.
- A rise in population size would increase consumption and would be likely to stimulate an increase in investment and government spending.
- A decrease in AD may be caused by a fall in share prices on global markets. This is because wealth would decline, which would be likely to reduce consumption, and if firms find it more…