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Chapter 24: Q 22. (page 601)

What are the components of the aggregate demand (AD) curve?

Short Answer

Expert verified

There are four components of the AD curve.

Step by step solution

01

Step 1. Definition

Aggregate demand is the demand for all the finished goods and services in the economy.

There are four components of the AD (aggregate demand) curve i.e., consumption, investment, government spending, and net exports.

02

Step 2. Explanation

1. consumption: consumption comprises all the expenditure in total on the consumption of goods and services which may be durable, semi-durable, or non-durable.

2. investment: investment is the expenditure incurred by the purchase of machines, plants, equipment, etc., to increase our production capacity.

3. government expenditure: it is also an expenditure experienced on the procurement of consumer goods and capital goods to satisfy the combined wants of the economy like parks, hospitals, and roads.

4. net exports: net exports are the difference of imports and exports. It shows the net demand for a local product in the rest of the world.

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Most popular questions from this chapter

What is the Keynesian zone of the SRAS curve? How much is the price level likely to change in the Keynesian zone?

If the economy is operating in the Keynesian zone of the SRAS curve and aggregate demand falls, what is likely to happen to real GDP?

The imaginary country of Harris Island has the

aggregate supply and aggregate demand curves as Table 24.3shows.

a. Plot the AD/AS diagram. Identify the equilibrium.

b. Would you expect unemployment in this economy to be relatively high or low?

c. Would you expect concern about inflation in this

economy to be relatively high or low?

d. Imagine that consumers begin to lose confidence about the state of the economy, and so AD becomes lower by 275at every price level.

Identify the new aggregate equilibrium.

e. How will the shift in AD affect the original

output, price level, and employment?

If new government regulations require firms to use a cleaner technology that is also less efficient than what they previously used, what would the effect be on output, the price level, and employment using the AD/AS diagram?

Review the problem in the Work It Out titled

"Interpreting the AD/AS Model." Like the information provided in that feature, Table 24.2shows information on aggregate supply, aggregate demand, and the price

level for the imaginary country of Xurbia.

a. Plot the AD/AS diagram from the data. Identify

the equilibrium.

b. Imagine that, as a result of a government tax

cut, aggregate demand becomes higher by 50at

every price level. Identify the new equilibrium.

c. How will the new equilibrium alter output? How

will it alter the price level? What do you think

will happen to employment?
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