Question

1.)Suppose a removal of a government regulation on the safety of goods produced in the US cause foreigners to become less confident about products made in America; illustrate the effect of this on the American economy by shifting the aggregate demand (AD) curve in the appropriate direction.

2.) A favorable economic outlook is shared in an announcement in the news by the government. Consumers are now confident about the future strength of the economy and the availability of jobs; illustrate the effect of this on the American economy by shifting the aggregate demand (AD) curve in the appropriate direction.

Provide your answer berow Aggregate Supply Aggregate Demand Real GDP Price Level
Aggregate Supply Aggregate Demand Real GDP Price Level
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Answer #1

1.

Aggregate demand (AD) is the aggregate of consumption (C), investment (I), government spending (G), and net export (Nx) (= export – import).

AD = C + I + G + Nx

Since foreigners are less confident, it hampers Nx – export should decrease.

The AD curve should shift inward (left side) as AD1, making the real GDP down.

2.

In this case, there is favorable condition of consumption. It increases C, which turns into shifting of AD outward (right side) as AD1.

It makes real GDP up.

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