Final answer:
The AD curve shifts to the right with an increase in government purchases or a decrease in taxes, as these stimulate economic activity by putting more money into the economy.
Step-by-step explanation:
The AD curve shifts to the right with a rise in government purchases (G) or a fall in taxes. This is because an increase in government spending, such as a surge in military expenditures or in healthcare, injects more money into the economy, boosting aggregate demand (AD). Similarly, tax cuts, especially those focused on business investment, leave more money in the hands of consumers and businesses, stimulating spending and shifting the AD curve to the right.
If real GDP is less than potential GDP, these policy choices can help pull the economy out of a recession. Conversely, if real GDP is already to the right of potential GDP, further increases in AD due to these policies may lead to inflationary pressures.