Question

Which of the following would not cause a shift in AD?

1) An increase in government spending
2) A fall in the cost of production
3) A reduction in income tax
4) A reduction in interest rates

Answer 1

A fall in the cost of production would not cause a shift in AD (Aggregate Demand).

Step-by-step explanation:

The correct answer is 2) A fall in the cost of production would not cause a shift in AD (Aggregate Demand).

Aggregate Demand (AD) refers to the total demand for goods and services in an economy at a given price level. It is affected by factors such as government spending, income tax, and interest rates. However, a fall in the cost of production, such as a decrease in wages or raw material prices, would affect the Aggregate Supply (AS) curve rather than the AD curve.

When the cost of production decreases, it leads to a rightward shift in the AS curve, allowing firms to produce more output at a lower price level. This would result in an increase in real GDP and a decrease in the price level. It does not directly impact the AD curve.