ECONOMICS
AGGREGATE DEMAND
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Question
[CLICK ON ANY CHOICE TO KNOW THE RIGHT ANSWER]
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Price Level decreased, or government expenditures increased
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Price Level decreases, or government instituted a tax credit
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Government expenditures increase, or government instituted a tax credit
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None of the above
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Detailed explanation-1: -An increase in any of the components of aggregate demand – consumption spending, investment spending, government spending, and net exports (X-M) – shifts the aggregate demand curve to the right, and a fall in any of these components shifts it to the left.
Detailed explanation-2: -Increased government spending is likely to cause a rise in aggregate demand (AD). This can lead to higher growth in the short-term. It can also potentially lead to inflation.
Detailed explanation-3: -The aggregate demand curve, or AD curve, shifts to the right as the components of aggregate demand-consumption spending, investment spending, government spending, and spending on exports minus imports-rise. The AD curve will shift back to the left as these components fall.
Detailed explanation-4: -A reduction in taxes or an increase in transfer payments causes an increase in consumer wealth and investments, driving the real GDP up and in turn shifting aggregate demand rightward to AD2. The same effect is felt when the government increases its spending on something like healthcare.
Detailed explanation-5: -An increase in the investment tax credit, or a reduction in corporate income tax rates, will increase investment and shift the aggregate demand curve to the right. Real GDP and the price level will rise.