Question

Explain how and why each of the following factors would influence current aggregate demand in the United States: a. increased fear of recession b. increased fear of inflation c. rapid growth of real income in Canada and Western Europe d. a reduction in the real interest rate e. a higher price level (Be careful)

Answer 1

The effects of the given factors on current U.S. aggregate demand would be:

• a. Lower current aggregate demand (AD).
• b. Higher current AD.
• c. Higher current AD.
• d. Higher current AD.
• e. Lower current AD.

What affects Aggregate Demand?

When there is an increased fear of recession, aggregate demand drops as people want to save money for the recession. A higher price level will make things more expensive so AD drops as well.

When there is a fear of inflation, people increase spending so they can buy goods before prices increase.

Real income growth in other countries will lead to higher exports which will increase national wealth and therefore allow consumers to purchase more goods.

An reduction in real interest rates makes loans cheaper to be acquired and spent on consumption.

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