Question

AD will shift to the right, other things being equal, when:

A. the government budget deficit increases because government purchases rose.
B. under any of the above circumstances.
C. the government budget deficit increases because taxes rose.
D. the government budget deficit increases because transfer payments fell.

Answer 1

AD will shift to the right when there is increased government spending on military, tax cut focused on business investment, or government spending on healthcare.

Step-by-step explanation:

A surge in military spending is an increase in government spending. This will cause the AD curve to shift to the right. If real GDP is less than potential GDP, then this spending would pull the economy out of a recession. If real GDP is to the right of potential GDP, then the AD curve will shift farther to the right and military spending will be inflationary.

A tax cut focused on business investment will shift AD to the right. If the original macroeconomic equilibrium is below potential GDP, then this policy can help move an economy out of a recession.

Government spending on healthcare will cause the AD curve to shift to the right. If real GDP is less than potential GDP, then this spending would pull the economy out of a recession. If real GDP is to the right of potential GDP, then the AD curve will shift farther to the right and healthcare spending will be inflationary.