Question

Suppose the business owners’ expectations about the future economic environment improved. How does this impact the aggregate demand curve? Which parameters can capture this change?

A) Shift to the right; Increase in consumer spending
B) Shift to the right; Increase in business investment
C) Shift to the left; Decrease in consumer spending
D) Shift to the left; Decrease in government spending

Answer 1

Improved business owners' expectations about the economic environment will shift the aggregate demand curve to the right, representing an increase in business investment.

Step-by-step explanation:

If business owners' expectations about the future economic environment improve, it will likely result in increased confidence leading to a shift of the aggregate demand (AD) curve to the right. This shift indicates that at least one of the components of aggregate demand—consumption spending (C), investment spending (I), government spending (G), or net exports (X-M)—has increased, causing greater total spending at every price level. In this scenario, the parameter that captures the change is an increase in business investment, as business owners invest more in anticipation of a better economic future. Therefore, the correct answer is B) Shift to the right; Increase in business investment.