Question

In: Economics

Which of the following shifts aggregate demand to the left? a. an increase in the price...

Which of the following shifts aggregate demand to the left?

a. an increase in the price level.

b. an increase in net exports.

c. Congress passes a new investment tax credit.

d. households decide to save a larger fraction of their income.

Solutions

Expert Solution

Leftward shift of the aggregate demand curve implies a decrease in aggregate demand.

There are four components of aggregate demand - Consumption spending, Investment spending, Government spending, and Net exports.

Decrease in any one or more than one of these will lead to decrease in aggregate demand.

If households decide to save a larger fraction of their income then this implies that they will be reducing their consumption expenditure. This will reduce the aggregate consumption expenditure in the economy.

This in result will lead to decrease in aggregate demand and will shifts the aggregate demand to the left.

Hence, the correct answer is the option (d).

Rahul Sunny answered 2 years ago
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