Why the Aggregate Demand Curve Might Shift

Consumer Spending:
Even when the price level of goods and services is stable, U.S. consumers may choose to consume more.
When consumers decide to purchase more, the aggregate demand curve shifts to the right. Some of the
factors that alter consumer spending habits are:
Wealth: Stocks, bonds, and physical assets are all considered consumer wealth. A sudden
increase in any of these physical or financial assets allows producers to consume more, thereby
increasing aggregate demand as a result of the wealth effect. Conversely, a major decrease in
consumer wealth lowers aggregate demand.
Consumer expectations: Changes in consumer expectations affect aggregate demand. For
example, if Joe is expecting his annual Christmas bonus, in anticipation of receiving his bonus he
will consume more goods. This effect increases the current consumption for goods and increases
aggregate demand.
Household debt: If households experience higher debt than normal, consumers may be forced
to cut current spending to pay off the amassed debt. If this occurs, consumption declines and the
aggregate demand curve shifts to the left.
Taxes: When personal income taxes decrease, consumers have more disposable income to use
for goods and services. This shifts the aggregate demand curve to the right. Tax hikes shift the
curve to the left.

Investment Spending:
Sometimes investment spending is confused with investing in stocks and bonds, or financial assets. To
an economist, investment is when firms purchase factors of production to facilitate their supply. When
investment spending declines, it shifts the aggregate demand curve to the left; when investment spending
increases, it shifts the curve to the right. Investment spending is determined by two factors:
Real interest rates: Interest is the price of money. As interest rates rise, fewer firms will invest
because it will become too costly to borrow money.
Expected returns: If firms expect high returns from their purchases of capital, they will be
more likely to consume more, thereby shifting the aggregate demand curve to the right.

Government Spending:
When the government decides to spend more on the economy, the aggregate demand curve shifts to the
right. This happens because the revenue that the government spends increases employment and expands
businesses. With more jobs, people have more money, therefore increasing aggregate demand. However,
if the government decreases spending, the aggregate demand curve shifts to the left.

Exports:
When U.S. and foreign consumers increase spending on U.S. exports and decrease the spending on
imports, this translates into an increase in aggregate demand. The aggregate demand curve thus shifts to
the right. On the other hand, the aggregate demand curve shifts to the left if U.S. and foreign consumers
buy more imported products. The change in exports is caused by three factors: the price level, the level of
income for foreigners, and the strength of the dollar relative to other currencies.