The Aggregate Demand (AD), Aggregate Supply (AS) model is used to predict the consequences of many different events, including the events described below. After reading these, describe three specific events that could have caused the shift shown in the graph below, using your own words.
- When the stock market is booming, people are wealthier, so they are likely to purchase more goods and services. A stock market boom or a stock market crash can cause AD to shift.
- Consumers are much more likely to purchase big-ticket items on credit when interest rates are low. In addition, business owners are more likely to borrow money to finance investment projects when interest rates are low. Therefore, a decrease or increase in interest rates can cause AD to shift.
- Lower tax rates result in more take-home pay, giving households more purchasing power. Tax cuts or tax hikes will cause AD to shift.
- When consumers are confident about the future and feel secure in their jobs, they are more likely to make purchases. If consumers are worried about a recession or being laid off from their jobs, they will likely cut back on unnecessary spending. Similarly, business owners are more likely to engage in expansion when they are optimistic about the future. Changes in consumer confidence and business expectations affect AD.
- The federal government can engage in fiscal policy by increasing or decreasing government spending or taxes. Fiscal policy can be used to cause AD to shift.
- The Federal Reserve can engage in monetary policy by increasing the money supply to lower interest rates or decreasing the money supply to raise interest rates. Monetary policy can be used to cause AD to shift.
Describe three specific events that could have caused the shift shown in the graph, using your own words.
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