Question

An increase in investment creates a ______ ______ in aggregate demand, the aggregate demand curve shifts ________ potentially brining ________ phase of the business cycle.

larger; increase; rightward; expansion

larger; decreases; leftward; recession

smaller; increases; rightward; expansion

smaller; decreases; leftward; recession

Answer 1

Basically there are 4 components of aggregate expenditure given as

AE = C + I +G +NX , C = Consumption , I =Investment , G = Government expenditure , NX = Net exports

So if the investment rises aggregate expenditure increases . This will shift the IS curve rightwards in ISLM model . Also , shift in IS curve will shift the aggregate demand ( AD ) . But increase in investment will not shift the aggregate demand as much as initial increase because of crowding out effect , some firms will leave the industry and there will be a smaller shift in the aggregate demand . Hence aggregate demand will shift rightwards but that shift will be smaller so as aggregate demand increases , there will be expansion period in the economy .

Hence An increase in investment creates a smaller increases in aggregate demand, the aggregate demand curve shifts rightward potentially bringng expansion phase of the business cycle.

Hence ( c ) part is a correct answer