3. Aggregate Demand and the Aggregate Demand Curve (MI Explanations should be brief, accurate and clear. Copying the text from the lecture slides is not allowed!) (a) Dene aggregate demand and its components. (b) What relation reects the aggregate demand curve? What is the shape of the AD curve? Derive the AD curve from the Keynesian Cross graph. (c) Give the three reasons for this shape of the aggregate demand curve and explain each of them. ((1) What are the reasons for the shifts of the AD curve? Explain briey. (e) What will happen to the AD curve (it will shift to the right; it will shift to the left; or it will not change its position and there will be the movement up or down along the curve) as a result of each of the event listed below. In each case determine the mponent of aggregate demand that changes, and the mponent of this mponent, that is for consumption demand C your choice is current consumption, purchases of durable goods and/or payments for services; for investment demand 1 your choice is purchases of new equipment, residential construction, non-residential construction and/or inventory investment; for net exports NX dene either it is the change in exports Ex or in imports 1m, or in both, briey explaining the direction of its change. Which of these events can inuence aggregate supply in the short run? in the long run? Hint: Give your answers in the form of the following table and do not rewrite the tasks, graphs are not needed. The Component(s) of AD and its (their) Change The Change in the AD curve (With a short explanation) (a) (i) Consumers become more condent and are more willing to spend more from their current disposable income. (ii) The decrease in the purchasing power of money limits the expansion of consumer spending. (iii) Consumers become less willing to borrow to nance their spending. (iv) Government reduces personal income taxes. (v) Consumers real nancial wealth falls because of ination (vi) The interest rate on mortgage loans becomes higher. (vii) The new technology is developed, and rms place orders for more technically advanced equipment. (viii) Government decreases corporate prots tax rates. (ix) Firms begin to use their existing plant capacity more optimally. (x) Interest rates rise as a result of a tight monetary policy. (xi) Lenders are less willing to lend to businesses. (xii) Lower interest rates resulting from the fall in prices stimulate rms to buy more plants and equipment. (xiii) Government conducts the policy of the expansionary balanced budget. (xiv) There is the increase in the budget surplus. (xv) The country's currency appreciates due to the higher demand for it in the foreign exchange market. (xvi) Foreign countries purchase more goods produced within the domestic economy as a result of the change in tastes. (xvii) There is a decline in the foreign economies level of economic activity