Economics- question from Schweser

Whicj of the following factors would least likely shift the aggregate demend curve? A. Federal Deficit expands B. Expected inflation decreses C. The price level increases The answer given is C, but I think its A… Can anyone explain?

Price is determined by interaction of demand and supply, if demand or supply alone explains why the price changes then whole mechanism will fail. With this I mean, demand or supply (alone) should never explain why price changes, its there ‘interaction’ that should explain why price changes.

oops…bad net connection

oops…bad net connection

i think its A too. federal deficit expanding is an example of the crowding out effect which decreases demand. schwesser has questionable questions sometimes

In the book it says that as long as that the Inflationary expectations are unchanged (i.e. the the inflation numbers are as the expected), increase in price level will not shift the demand curve. I dont quite agree with this explaination… the point it does effect the aggregate demand after all and change in federal deficit actually affects the aggregate demend but not to an extent as price level does… Am I correct?

The question asks which is LEAST likely, meaning which of the answers will NOT shift the demand curve. Answer C, the price level increases, will cause a change in quantity demanded (decrease), which is a movement along the curve, not a shift of the curve. This is an easily testable concept - what causes a movement along the curve, and what causes a shift of the curve. Both A and B cause a shift in the demand curve, leaving answer C as the least likely (or in this case, not likely at all) to shift the aggregate demand curve.

Ok… agreed Just a basic question-> When does the demend curve shift right/left ?(e.g. Demand for a local pizza) and when is there a movement along the curve?. Just need a clarification Thanks !!

There is only movement along the demand curve if the price level of the product changes (the x-axis input). Any other changes will shift curves, although you need to determine whether the demand or supply curve would shift. In your example, you changed the price level of a complement/substitute, which would shift the demand curve for the product at hand. Incidently, demand for a local pizza is relevant for the demand curve for a firm; aggregate demand relates to market demand (for which demand for a local pizza could have a likely minor impact).

One basic concept that you should master is that a shift from one demand curve to another is caused by a change in a nonprice determinant of demand (e.g., change in income, consumer tastes or change in price of other goods) while MOVEMENT ALONG THE CURVE is caused by change in the product’s own price and quantity. Hence any change in price level will NOT shift a demand curve or AD curve. Or put it this way, change in quantity demanded is MOVEMENT ALONG DEMAND CURVE while change in demand is SHIFT FROM ONE CURVE TO ANOTHER. A rightward shift represents an increase in the quantity demanded (at all prices) while a leftward shift represents a decrease in the quantity demanded (at all prices). I hope this helps you, varundarji.

Wow!!! now I get it… Thanx “FinPaul” you are a genius

FinPaul, Next to my 1st year Econ prof, best explanation I have heard in a while.