If the demand for labor decreases, then wages will fall and labor employed falls. 1. Graph to show increase in AD. An increase in AD (shift to the right of the curve) could be caused by a variety of factors. Like many economic variables in a reasonably free-market economy, interest rates are determined by the forces of supply and demand. Aggregate demand increases when the components of aggregate demand–including consumption spending, investment spending, government … For instance, you had to pay 10 percent more in income taxes this year than you did last year, but your total income stayed the same, you have less money left over to spend on things like entertainment, clothes, eating out and travel. More Money Available, Lower Interest Rates . In a market economy, all prices, even prices for present money, are coordinated by supply and demand.Some individuals have a greater demand … Since income taxes take money away from consumers, they tend to decrease aggregate demand. However, the supply of bonds increases as bond prices increase and interest rates decrease. The Government Multiplier. Thus, a drop in the price level decreases the interest rate, which increases the demand for investment and thereby increases aggregate demand. Shifts in the aggregate demand curve . Recall that as the price level falls the interest rate also tends to fall. At a lower price level, interest rates usually, fall causing increased AD. Specifically, nominal interest rates, which is the monetary return on saving, is determined by the supply and demand of money in an economy. Contractionary monetary policy attempts to _____ aggregate demand by _____ interest rates. There is more than one interest rate in an economy and even more than one interest rate on government … When interest rates are low, bond prices are high. The third reason for the downward slope of the aggregate demand curve is Mundell-Fleming's exchange-rate effect. Suppose interest rates were to fall so that investors increased their investment spending; the aggregate demand curve would shift to the right. Interest rates does not directly affect the aggregate money supply. At a lower price level, exports are relatively more competitive than imports. If government were to cut spending to reduce a budget deficit, the aggregate demand curve would shift to … Because low-interest rates cause higher bond prices and result in a lower return on investment, the demand for bonds is lower. a. decrease increasing b. increase decreasing c. decrease decreasing d. increase increasing e. increase maintaining I assume you’re asking about the supply of money. 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. Otherwise, Bernard McAlinden provides a good answer about the effect on supply of goods and services. 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