Just as with demand for one good, there is a difference between moving along AD and shifting it. A change in the price level moves along Aggregate Demand. Anything else that changes spending at every price level shifts the curve.
Key idea
AD shifts right (an increase) when consumption, investment, government purchases or net exports rise at every price level, and left when they fall. A change in the price level is a movement along AD, not a shift.
Why it works
AD is the sum $C + I + G + NX$ at each price level. If households feel more confident, they buy more at every price level, so every point on the curve moves right. The same holds for each component. The price level is the variable on the vertical axis, so changing it only slides the economy to another point on the same curve.
| Component | Shifts AD right | Shifts AD left |
|---|---|---|
| C | confidence up, wealth up, taxes cut | confidence down, stock crash, taxes up |
| I | better expected sales, lower interest rates, investment tax credit | gloomy expectations, higher interest rates |
| G | more government purchases | fewer government purchases |
| NX | incomes abroad rise, our currency depreciates | recession abroad, our currency appreciates |
A worked example
Worked example: Shift or movement?
Decide what happens to AD: (a) the price level rises; (b) incomes in the country's trading partners rise; (c) the government cuts income taxes.
- (a) The price level is on the axis: a movement up along AD, no shift.
- (b) Foreigners buy more of our exports: NX rises, AD shifts right.
- (c) Households keep more of their income and spend more: C rises, AD shifts right.
Answer: (a) movement along; (b) right; (c) right
Common mistake
Shifting AD when the price level changes. That is a movement along AD. Check: ask "would spending change at every price level?" If the event is a price-level change, the answer is no: it is a movement.