Starting from potential output, if firms become more optimistic about the future and decide to increase their investment in new capital, then this will shift the ______ curve to the right and generate ______.
A) aggregate demand; a recessionary output gap
B) aggregate supply; a recessionary output gap
C) aggregate demand; an expansionary output gap
D) aggregate supply; an expansionary output gap

Question

Quizplus · Accepted Answer

When firms increase investment, it boosts aggregate demand, shifting the aggregate demand curve to the right, leading to an expansionary output gap as actual output exceeds potential output.

Starting from Potential Output, If Firms Become More Optimistic About