What would shift aggregate demand (AD) to the right?

Question

BlackTom AI · Accepted Answer

Aggregate demand equals C + I + G + (X − M), so any change that raises consumption (C), investment (I), government spending (G), exports (X), or reduces imports (M) will raise AD and shift the AD curve to the right.

Step-by-step reasoning:
1. Definition: The AD curve shows total planned spending on domestic goods and services at each price level. A rightward shift means more spending at every price level.
2. Algebraic expression: AD = C + I + G + X − M. Therefore, increasing C, I, G, or X, or decreasing M, increases the sum and thus AD.
3. Examples of shifts:
   - If government increases G by $50 billion, AD increases by $50 billion (holding other components constant).
   - If consumer confidence rises and C increases by $30 billion, AD increases by $30 billion.
   - If a depreciation raises exports by $20 billion and lowers imports by $10 billion, net X − M rises by $30 billion, shifting AD right.
4. Causal mechanisms: lower taxes, fiscal stimulus, lower interest rates (encouraging I and C), higher foreign demand, or currency depreciation can produce these component changes and shift AD right.

Why the correct answer is correct:
The choice “anything that increases C, I, G, X, or decreases M” directly maps to the AD identity above and therefore correctly identifies the set of changes that expand aggregate demand.

Why the other options are incorrect:
- “Higher taxes” typically reduce disposable income and consumption (C), so they shift AD left, not right.
- “A higher interest rate” increases the cost of borrowing, reducing investment (I) and some consumption, shifting AD left.
- “All of these” is wrong because two listed options (higher taxes and higher interest rates) would decrease AD, so not all listed options increase AD.

Conclusion: The correct answer is “anything that increases C, I, G, X, or decreases M,” which matches the provided answer.

What would shift aggregate demand (AD) to the right?Single choice

Similar Questions

What would lower aggregate demand (AD)?

Why is aggregate demand (AD) downward-sloping?