Decreasing Aggregate Demand

Now let's look at an example in which aggregate demand decreases, instead of increasing. Just as before, there are several things that could cause a decrease in aggregate demand:

• A decrease in autonomous consumption
• A decrease in the money supply
• A decrease in investment from some other cause beside changing interest rates
• A decrease in government purchases of goods and services
• An increase in taxes
• A decrease in the size of a balanced budget

In several examples in earlier chapters, we looked at the results of a decrease in autonomous consumption. In the Simple Keynesian Model, we recall, a drop in autonomous consumption would lead to a larger drop in production, through the multiplier effect. Let's see how that will hold up when we allow for aggregate supply.

The Graphic View (Part One)