Suppose consumption increases at each price level. As a result, aggregate demand and the AD curve shifts
Select one:
a. increases; leftward
b. decreases; leftward
c. increases; rightward
d. decreases; rightward
The correct answer and explanation is:
The correct answer is c. increases; rightward.
Explanation:
Aggregate demand (AD) represents the total quantity of goods and services demanded in an economy at different price levels. It is influenced by factors such as consumer spending, government spending, investment, and net exports. When consumption increases at each price level, this directly impacts aggregate demand by increasing the total demand for goods and services.
Consumption is a key component of aggregate demand. As consumers increase their spending, businesses respond by increasing production to meet the higher demand. This results in an increase in the total quantity of goods and services demanded at every price level, shifting the AD curve to the right.
The shift to the right of the AD curve signifies that, for any given price level, the economy is now demanding more goods and services than before. This is a positive economic indicator because higher consumer spending often leads to increased production, employment, and potentially higher economic growth. A rightward shift in the AD curve means that the economy is experiencing higher aggregate demand, which can lead to upward pressure on prices, especially if the economy is close to full capacity.
It is important to note that a shift in the AD curve is not caused by a change in the price level itself but by factors such as changes in consumer confidence, disposable income, or fiscal policy. In this case, the increase in consumption leads to a greater total demand, resulting in the AD curve shifting to the right.