Question

Why does the aggregate demand curve shift when “animal spirits” change?

Short answer

With change in animal spirit or the uncertain shift in pattern of investment at difficult time ends up in increase within the autonomous demand and alter within the planned investment.

Linear demand equation is:

${\mathrm{D}}_{\mathrm{X}}=\mathrm{C}+\mathrm{bY}$

Where,

$\text{-}{D}_X\text{is demand for good}X\text{.}$

$\text{- C is autonomous consumption.}$

$\text{- bY is b fraction of consumption as per the income level}Y\text{.}$

Step-by-step solution

Concept Introduction 

Aggregate demand refers to the mixture of demand for all goods and services within a given market place. Animal spirits refers to the case of constructing financial or buying decisions at the time of uncertainty. Autonomous demand refers to the demand level which exists even at zero income level.

Explanation of Solution 

With change in animal spirit or the uncertain shift in pattern of investment at difficult time ends up in increase within the autonomous demand and alter within the planned investment.

Linear demand equation is:

${\mathrm{D}}_{\mathrm{X}}=\mathrm{C}+\mathrm{bY}$

Where,

$\text{-}{D}_X\text{is demand for good}X\text{.}$

$\text{- C is autonomous consumption.}$

$\text{- bY is b fraction of consumption as per the income level}Y\text{.}$

Now, if autonomous demand increases within the equation shown above, it'll report increase in aggregate demand thereby putting pressure on aggregate output. Moreover, this example of increased level of output ends up in change within the persisting inflation rates.