ECONOMICS (CBSE/UGC NET)

Detailed explanation-1: -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-2: -A change in inflation changes the level of prices in the economy and thereby cause a movement along the AD curve rather than a shift. Therefore, the correct option is D, an increase in inflation.

Detailed explanation-3: -As discussed earlier, contractionary monetary policy shifts the AD curve to the left. The AS/AD model predicts that the immediate effect of this policy will be to send the economy even deeper into a recession, with output falling even farther below its full-employment level, as shown by equilibrium point E1.

Detailed explanation-4: -If policymakers hike interest rates and communicate that further hikes are coming, this may convince the public that policymakers are serious about keeping inflation under control. Long-term contracts will then build in more modest wage and price increases over time, which in turn will keep actual inflation low.