Question

How would a dramatic increase in the value of the stock market shift the AD curve? What effect would the shift have on the equilibrium level of GDP and the price level?

Short answer

It would shift the AD curve rightwards.

The equilibrium level of GDP will increase as well as the price level.

Step-by-step solution

Step 1. Definitions.

Aggregate supply is the total quantity of output (i.e. real GDP) firms will produce and sell.

Aggregate demand is the amount of total spending on domestic goods and services in an economy.

Step 2. The shift in the AD curve.

A dramatic increase in the value of the stock market will shift the AD curve rightwards. An increase in the value of the stock market will lead to an increase in confidence of individuals which will increase consumer spending,

Step 3. Equilibrium GDP and price level.

The equilibrium level of GDP will increase as well as the price level. An increase n equilibrium GDP as the consumer spending increases shifts the equilibrium GDP higher and also increases the price level as a rise in price will lead to confidence among the individuals.