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What factors cause the aggregate demand curve to shift?

The equation for aggregate demand is defined as C+I+G+(X-M) where C is consumption by households on things such as cars, furniture and petrol, I is investment by firms in new technology, factories and inventories, G is government spending and X-M represents net exports i.e. total exports minus total imports. Any factor which has an impact on one or more of these components will shift the aggregate demand curve. A rise in taxes such as VAT and income tax will reduce consumption and a rise in corporation tax will reduce investment both leading to a fall in aggregate demand represented by a leftward or downward shift of the AD curve in a classic AD-AS diagram. An increase in government spending just before a general election for example will increase AD causing a rightward or upward shift of the AD curve. An increase in the exchange rate will generally reduce AD by making imports less expensive and exports more expensive worsening the balance of trade in goods and services. An increase in the interest rate will make it more costly for firms to borrow and therefore to invest. This will therefore have a negative effect on AD through its impact on the I component. An increase in subsidies or tax relief for large companies would be likely to stimulate investment leading to an upward shift in AD.

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