What Causes the Aggregate Demand Curve to Shift?

by Crystal Vogt ; Updated July 27, 2017
An increase in government spending can shift the aggregate demand curve.

Two ways to analyze economic relationships is by using aggregate demand and aggregate supply curves. The aggregate demand curve illustrates the economy's demand for all goods and services at various price levels. To calculate the aggregate demand curve, add consumer spending, capital investment by companies and government spending. Add that sum to total net exports, which are the exports of goods and services minus the imports of goods and services. The aggregate demand curve can shift depending on certain factors.

Expectations

Consumer and corporate expectations of key economic factors such as inflation or expected future income can cause the aggregate demand curve to shift. Unknowns about an individual's or company's economic future can spur higher saving and low spending, which would decrease the amount of demand and thus shift the curve. On the other hand, higher anticipated profits or paychecks can increase spending and boost the aggregate demand curve. Consumer confidence and expectations are an important indicator as to whether the demand curve will shift and in what way.

Government Spending

When government spending or fiscal policies change, the aggregate demand curve is impacted. Changes in government spending that shift the demand curve include increased or decreased taxation, social service benefits, government debt, military spending or overall spending. For example, how much the government taxes your income could affect how much disposable income you have to spend, and will therefore either spur or reduce consumer consumption and shift the curve.

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Interest Rates

A high or low interest rate can shift the aggregate demand curve. For example, if banks lower interest rates on credit cards and various types of loans, consumers and corporations are "more likely to borrow money," according to Winthrop University. This increases the amount of investment and spending that will take place, which shifts the demand curve. The inverse can happen with higher interest rates in that if rates rise, spending and investment falls, which also shifts the demand curve.

Fluctuating Economies

Economies and variances in economic stability outside of the U.S. government can shift the aggregate demand curve. These variances can include the strength or weakness of a certain currency, the exchange rate across currencies, the foreign income of specific countries, and an increase or decrease in international demand of a good or service. For example, the aggregate demand curve may shift in the United States if overseas demand for a product manufactured in the country decreases due to declining overseas income and thus declining spending.

About the Author

Crystal Vogt has been an editor and freelance writer since 2005 and has had her work mentioned on MediaBistro, Yahoo! Finance and MSN Money, among other outlets. She received her M.S. in journalism from Boston University and holds a B.A. in English from UC Santa Barbara.

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