Page 217 - Krugmans Economics for AP Text Book_Neat

figure 17.2 Shifts of the Aggregate Demand Curve

(a) Rightward Shift (b) Leftward Shift
Aggregate Aggregate
price Increase in price Decrease in
level Aggregate level Aggregate
Demand Demand Section 4 National Income and Price Determination

AD 1 AD 2 AD 2 AD 1

Real GDP Real GDP

Panel (a) shows the effect of events that increase the quantity of effect of events that decrease the quantity of aggregate output de-
aggregate output demanded at any given aggregate price level, for manded at any given aggregate price level, such as a fall in wealth
example, improvements in business and consumer expectations or caused by a stock market decline. This shifts the aggregate de-
increased government spending. Such changes shift the aggregate mand curve leftward from AD 1 to AD 2 .
demand curve to the right, from AD 1 to AD 2 . Panel (b) shows the

shift implies that the quantity of aggregate output demanded falls at any given ag-
gregate price level.
A number of factors can shift the aggregate demand curve. Among the most im-
portant factors are changes in expectations, changes in wealth, and the size of the ex-
isting stock of physical capital. In addition, both fiscal and monetary policy can shift
the aggregate demand curve. All five factors set the multiplier process in motion. By
causing an initial rise or fall in real GDP, they change disposable income, which leads
to additional changes in aggregate spending, which lead to further changes in real
GDP, and so on. For an overview of factors that shift the aggregate demand curve, see
Table 17.1 on the next page.
Changes in Expectations Both consumer spending and planned investment spending
depend in part on people’s expectations about the future. Consumers base their spend-
ing not only on the income they have now but also on the income they expect to have in
the future. Firms base their planned investment spending not only on current condi-
tions but also on the sales they expect to make in the future. As a result, changes in ex-
pectations can push consumer spending and planned investment spending up or
down. If consumers and firms become more optimistic, aggregate spending rises; if
they become more pessimistic, aggregate spending falls. In fact, short -run economic
forecasters pay careful attention to surveys of consumer and business sentiment. In
particular, forecasters watch the Consumer Confidence Index, a monthly measure cal-
culated by the Conference Board, and the Michigan Consumer Sentiment Index, a sim-
ilar measure calculated by the University of Michigan.
Changes in Wealth Consumer spending depends in part on the value of household
assets. When the real value of these assets rises, the purchasing power they embody
also rises, leading to an increase in aggregate spending. For example, in the 1990s,
there was a significant rise in the stock market that increased aggregate demand. And
when the real value of household assets falls—for example, because of a stock market

module 17 Aggregate Demand: Introduction and Determinants 175