Homework Help: Macro Econ

kevzik

kevzik

CAGiversary!
Feedback
34 (100%)
So I am having a difficult time with Agg demand. Maybe I am making it harder that what it really is. Could some of you guys maybe give me a few points to get me started on the question below? I am not asking for a paper, just some things and ideas that could help. I actually want to understand this. Thanks!

Supposed the government reduces spending on highway construction by $10 billion Which way does the aggregate demand curve shift? Explain why shift may be larger than $10 billion. Explain why the shift might be smaller than $10 billion.
 
It has been a while since I took macro, but I think it would shift to the left, and it might be smaller/larger due to the multiplier effect - but I could be entirely wrong so take it with a grain of salt :)
 
Okay, well I assume you went through the whole concept of AD being affected by Consumption, Investment, and Government spending, right? Well, when you've got a decrease in government spending, the AD curve is going to shift left since one of the components of aggregate demand was decreased. I haven't had to deal with the whole "why might the shift be larger or smaller" nonsense since intro economics, but I know there were two different effects that can act on it. God, my mind's drawing a blank. I'll think about it. I know the multiplier effect factored in, but I forget if the other one was the crowding out effect... hmm...
 
Thanks for the help guys...now I am getting flashbacks about the multiplier effect. I know that has something to do with it. I am going to check my notes again. Thanks!
 
C+I+G+NE (Consumer + Investments + Government + Net Exports). The demand curve shifts to the left. For the effect to be 1:1, supply and demand would have to have a 1:1 ratio. So most likely the effect will not be exactly $10B
 
If other things are equal, the D curve shift to the left. I think the factor would affect the larger and smaller is the supply curve.

Smaller: supply decreases, demand decreases, price just drop a little bit (shfit to left)
Larger: supply increases, demand decreases, price have a big drop (shfit to right)

I'm not sure if I got that right or not, just give u some ideas.
 
[quote name='JBaby']C+I+G+NE (Consumer + Investments + Government + Net Exports). The demand curve shifts to the left. For the effect to be 1:1, supply and demand would have to have a 1:1 ratio. So most likely the effect will not be exactly $10B[/quote]
That is GDP.
 
I am glad so many cags know their econ (figures since this site is based on money). I needed the jump start guys. Thanks a lot once again.
 
[quote name='coniyee']That is GDP.[/quote]

As this is a macro class, Gross Domestic Product is a source of aggregate demand. A decrease in spending by the government decreases the aggregate demand (globally for our G/S) and increases the availablity of our G/S for others to import.
 
[quote name='JBaby']As this is a macro class, Gross Domestic Product is a source of aggregate demand. A decrease in spending by the government decreases the aggregate demand (globally for our G/S) and increases the availablity of our G/S for others to import.[/QUOTE]

I'm guessing the OP's class is focusing on a closed economy... throwing global demand in there makes things more confusing (despite the fact that it's actually a factor.)
 
[quote name='Chacrana']I'm guessing the OP's class is focusing on a closed economy... throwing global demand in there makes things more confusing (despite the fact that it's actually a factor.)[/quote]

Yea, I am pretty sure my instructor is going off a closed economy...thanks for reminding me about the mutiplier and crowding out effects. I was having a tough time because I completely forgot about these. Thanks a lot and I really shouldn't need much help now. :bouncy:
 
You must log in or register to reply here.
bread's done
Back
Top