Figure 9.1 shows three aggregate demand curves. A movement from curve AD1 to curve AD2 could be caused by a(n)
A) decrease in the money supply.
B) increase in taxes.
C) decrease in the price level.
D) increase in government spending.

Question

Figure 9.1 shows three aggregate demand curves. A movement from curve AD1 to curve AD2 could be caused by a(n) 
A) decrease in the money supply.
B) increase in taxes.
C) decrease in the price level.
D) increase in government spending.

Quizplus · Accepted Answer

An increase in government spending would shift the aggregate demand curve to the right from AD1 to AD2, indicating an increase in demand for goods and services. A decrease in the money supply (A) would shift the aggregate demand curve to the left, indicating a decrease in demand. An increase in taxes (B) would decrease disposable income, leading to a decrease in consumption spending, and hence a shift to the left of the aggregate demand curve. A decrease in the price level (C) would lead to an increase in the quantity demanded of goods and services, but not necessarily an increase in the demand, and hence a shift in the aggregate demand curve.

Figure 91 Shows Three Aggregate Demand Curves