Shifts in AD.docx

Shifts in AD: Expectations about future income, profit, price level, and wealth. (optimism and pessimism)             Downward sloping because: Real balance effect (wealth effect) P rise => real value of money falls => AD tend to fall The interest rate effect: P rise => increase in the interest rate => decrease in investment => AD tend to fall   Yield or rate of return on bond= annual interest payment x 100 Purchase price of bond   100/1000 x100=10% interest 100/900 x 100=11%   All these three major effects => as price level changes ( ^ or down) => movement along the AD curve   Foreign income and price levels (a) Higher the foreign income => ^ Export (US) =>^ AD (increase) =>AD shift to the right & vice versa (b) ^ foreign price level =>^ US expend and vice versa => ^ AD (shift to right) Government policy ^G => ^ income => ^ AD (^C) Down T=> ^ income => ^ AD (^ C or ^ I) Shift AD to the right Down government => down income => down AD } shift of AD ^ T => down income => down AD } to the left Increase in G   Long run Equilibrium: equilibrium at a price level where LRAS curves intersects AD curve   Shifts in AD Effects of Economic growth on the price level Supply side inflation Demand side inflation