If government were to cut spending to reduce a budget deficit, the aggregate demand curve would shift to … The ‘natural rate of unemployment’ is the rate of unemployment at equilibrium, at this rate wages are in equilibrium, and aggregate demand and aggregate supply are also in balance. If the demand for labor decreases, then wages will fall and labor employed falls. At a lower price level, exports are relatively more competitive than imports. Thus, a drop in the price level decreases the interest rate, which increases the demand for investment and thereby increases aggregate demand. Government spending has a multiplier just like everything else. Otherwise, Bernard McAlinden provides a good answer about the effect on supply of goods and services. Then, the aggregate demand curve would shift to the left. Since income taxes take money away from consumers, they tend to decrease aggregate demand. Increased consumption: a. decrease increasing b. increase decreasing c. decrease decreasing d. increase increasing e. increase maintaining At a lower price level, interest rates usually, fall causing increased AD. Aggregate demand increases when the components of aggregate demand–including consumption spending, investment spending, government … If the multiplier is 4, then a decrease in government spending of $10 million will result in a decrease in aggregate demand of $40 million, and the aggregate demand curve will shift left by $40 million. Interest rates does not directly affect the aggregate money supply. Recall that as the price level falls the interest rate also tends to fall. The third reason for the downward slope of the aggregate demand curve is Mundell-Fleming's exchange-rate effect. Like many economic variables in a reasonably free-market economy, interest rates are determined by the forces of supply and demand. I assume you’re asking about the supply of money. There is more than one interest rate in an economy and even more than one interest rate on government … Suppose interest rates were to fall so that investors increased their investment spending; the aggregate demand curve would shift to the right. More Money Available, Lower Interest Rates . However, the supply of bonds increases as bond prices increase and interest rates decrease. Graph to show increase in AD. Contractionary monetary policy attempts to _____ aggregate demand by _____ interest rates. Specifically, nominal interest rates, which is the monetary return on saving, is determined by the supply and demand of money in an economy. When interest rates are low, bond prices are high. Because low-interest rates cause higher bond prices and result in a lower return on investment, the demand for bonds is lower. Shifts in the aggregate demand curve . 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