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Chapter 9: Problem 5

According to classical economists, does an increase in saving shift the \(A D\) curve to the left? Explain your answer.

Short Answer

Expert verified
Yes, according to classical economists, an increase in saving does shift the AD curve to the left due to a decrease in consumption.

Step by step solution

01

Defining the AD curve

The Aggregate Demand (AD) curve is a macroeconomic concept that illustrates the total amount of goods and services that households, businesses, and the government are willing to purchase at each price level. The AD curve is downward sloping, which means as the price level decreases, the quantity of goods and services demanded increases, and vice versa.
02

Understanding what shifts the AD curve

A shift of the AD curve can happen due to many factors, commonly called the determinants of aggregate demand. They include changes in consumer expectations, fiscal policy, monetary policy, foreign income and investment etc. Essentially, any changes in consumption, investment, government spending or net export can shift the AD curve.
03

Analyzing the effect of increased saving

When there's an increase in saving, it means that households are consuming less because a part of their income is now going into savings. Hence, consumption decreases. Since consumption is a component of aggregate demand, a decrease in consumption will lead to a decrease in aggregate demand.
04

Concluding the effect on the AD curve

Since an increase in savings leads to a decrease in consumption, and consumption is a component of aggregate demand, an increase in saving would shift the AD curve to the left.

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Most popular questions from this chapter

Describe the relationship of the (actual) unemployment rate to the natural unemployment rate in each of the following economic states: (a) a recessionary gap, (b) an inflationary gap, and \((\mathrm{c})\) long-run equilibrium.

Beginning with long-run equilibrium, explain what happens to the price level and Real GDP in the short run and in the long run as a result of (a) a decline in \(A D,(b)\) a rise in AD, (c) a decline in \(S R A S\), and \((\) d) a rise in SRAS.

What is the state of the labor market in (a) a recessionary gap, (b) an inflationary gap, (c) long-run equilibrium?

Diagrammatically represent an economy in (a) an inflationary gap, (b) a recessionary gap, and (c) long-run equilibrium.

If wage rates are not flexible, can the economy be self-regulating? Explain your answer.
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