The figure above shows the aggregate demand curve.
-The aggregate demand curve in the figure above shifts rightward if
A)potential GDP increases.
B)the money wage rate falls.
C)taxes are cut.
D)government expenditure decreases.
E)the Federal Reserve raises the interest rate.

Question

The figure above shows the aggregate demand curve.
-The aggregate demand curve in the figure above shifts rightward if
A)potential GDP increases. 
B)the money wage rate falls. 
C)taxes are cut. 
D)government expenditure decreases. 
E)the Federal Reserve raises the interest rate.

Quizplus · Accepted Answer

A rightward shift in the aggregate demand curve indicates an increase in aggregate demand. Cutting taxes would increase disposable income, leading to higher consumer spending, and therefore, increasing aggregate demand. Potential GDP increasing (A) would shift the long-run aggregate supply curve, not the aggregate demand curve. The money wage rate falling (B) would increase short-run aggregate supply, but it would not shift the aggregate demand curve. Government expenditure decreasing (D) would decrease aggregate demand. The Federal Reserve raising the interest rate (E) would decrease investment and consumer spending, leading to a decrease in aggregate demand.

The Figure Above Shows the Aggregate Demand Curve