Answer to Question #18426 in Macroeconomics for Saud
The volume of consumption demand is determined by the volume and structure of income(household)and its preferences.Part of C.d. is also formed by c. So the decrease of AD is caused by contractionary monetarypolicy. Consumers tend to have certain expectations about the future of
the economy and will adjust their spending accordingly. If they would expect
the economy to not do so well in the future, saving would increase thus
decrease overall expenditures.
The value of investment demand depends onother things being equalthe level ofrealinterest rates: the higherthey are, the less is I.d., andvice versa, as well as the price dynamics. Inflationleadsto a decrease in I.d.
The net-export effect works like this: A higher price level increases the
relative price of domestic exports to other countries while decreasing the
relative price of foreign imports from other countries. This results in a
decrease in exports and an increase in imports and thus a decrease in net
exports. A lower price level has the opposite affect, causing a decrease in the
relative price of domestic exports to other countries while increasing the
relative price of foreign imports from other countries. This results in an
increase in exports and a decrease in imports and thus an increase in net
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