The U.S. aggregate demand curve shifts leftward if
A) the Federal Reserve hikes the interest rate and decreases the quantity of money.
B) the economic conditions in Europe improve so that European incomes increase.
C) there is a tax cut.
D) the exchange rate falls.

Question

Quizplus · Accepted Answer

When the Federal Reserve hikes the interest rate and decreases the quantity of money, it becomes expensive for consumers to borrow money to finance their purchases. As a result, the consumption and investment levels decrease, causing a leftward shift in the aggregate demand curve. Option B is incorrect because an improvement in economic conditions in Europe increases the export demand for U.S. goods, leading to a rightward shift in the aggregate demand curve. Option C is wrong because a tax cut would increase disposable income, leading to increased consumption and a rightward shift in the aggregate demand curve. Option D is incorrect because a fall in the exchange rate makes exports cheaper and attracts foreign buyers, increasing the export demand for U.S. goods and thereby causing a rightward shift in the aggregate demand curve.

The U.S. Aggregate Demand Curve Shifts Leftward If