Question

Explain whether each of the following will cause a shift of the AD curve or a movement along the AD curve. a. Firms become more optimistic and increase their spending on machinery and equipment. b. The federal government increases taxes in an attempt to reduce a budget deficit. c. The U.S. economy experiences 4 percent inflation.

Answer 1

a. AD curve will shift to the right

b. AD curve will shift to the left

c. Movement along the AD curve.

Step-by-step explanation:

a. When firms become more optimistic and increase their spending on machineries,this brings about changes in investment and it will cause a shift to the right in the aggregate demand curve.

b. When The federal government increases taxes in an attempt to reduce a budget deficit. This will cause a change in consumption as people will have less money to spend since disposable income has been reduced, and it will cause the aggregate demand curve to shift inwards to the left.

c. A 4 percent in US inflation will bring about a change in price level and there will be a movement along the aggregate demand curve.