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Changes in Aggregate Expenditure and Aggregate Demand

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The change in aggregate expenditure and demand curve is realized when any of the influences changes on aggregate planned expenditure other than level of price. Let’s consider an instance, when there is an increase in the exports as well as investments,  the increase in aggregate demand  and planned expenditure can be realized which in turn shifts both AD and AE curves simultaneously.

We can realize the statement in the figure. At an initial stage, the curve of aggregate planned expenditure is realized at AE0 and that of aggregate demand is realized at AD0. At this stage, the level of price is at 110 and the real GDP is realized as 13 trillion dollars which in turn measures the economy at point A in both parts of the figure.

Now, let’s consider a situation when investment is increased by one trillion dollars. With the stationary price level at 110, the curve of aggregate planned expenditure is moved upwards at AE1. The curve is realized to interest at 450line where the equilibrium is served at 15 trillion dollars at another point at B. The equilibrium of 15 trillion dollars is considered as the aggregate quantity of services, goods and products which are demanded by the constant prince at 110 which can be illustrates in second part of the figure where B is on the new curve of aggregate demand where the curve of aggregate demand has moved to AD1 at the rightward.

But the question that arises is how to calculate the shift of AD curve? We can solve the same by using multipliers. When the multiplier is larger, we can say that the shift of the curve of aggregate demand is also larger along with the change in the curve of aggregate expenditure. From this figure, we can notice that the value of multiplier is 2. We can notice that when the investment increased to 1 trillion dollars, it produces 2 trillion dollars of increase in quantity of aggregate service, goods and products which were demanded at every price level. Therefore, we can say that the increase in autonomous expenditure by one trillion dollars resulted into the shift of the curve of aggregate demand by 2 trillion dollars to the rightward direction.

In addition to the same, we can also state that when the autonomous expenditure realizes a decrease, the curve of aggregate expenditure is moved downwards and the curve of aggregate demand is moved to leftwards. If you want to notice the effects of the same you can reverse the situation that we discussed earlier. In the same figure where point B serves the initial economy condition, when the autonomous expenditure is decreased, the curve of aggregate expenditure is moved downwards from AE1 to AE0. Also, the curve of aggregate demand is moved leftward from AD1 to AD0 which means that the demand of the aggregate quantity of services, goods and products was reduced from 15 trillion to 13 trillion dollars.

 

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