The AD curve will shift to the left:
A) because of the wealth and interest rate effects.
B) if household wealth decreases.
C) if the aggregate price level falls.
D) if the government decreases taxes paid by households.

Question

Quizplus · Accepted Answer

If household wealth decreases, consumption expenditure will decrease, causing a leftward shift of the AD curve. The wealth effect explains that higher wealth allows households to increase their consumption expenditure, while a decrease in wealth reduces their spending. The interest rate effect refers to the fact that lower wealth increases the cost of borrowing, leading to a decrease in consumption and investment expenditure. However, the other options are incorrect. A fall in the aggregate price level would cause the AD curve to shift to the right, as it increases the purchasing power of households, leading to higher consumption expenditure. Similarly, a decrease in taxes paid by households would increase their disposable income, leading to higher consumption expenditure, and shifting the AD curve to the right.

The AD Curve Will Shift to the Left