Suppose households become more future-oriented and decide to save more at each income level. All other things unchanged, this will
A) shift the aggregate demand curve to the right.
B) shift the aggregate demand curve to the left.
C) not affect aggregate but rather aggregate supply because firms will now produce less.
D) shift both the aggregate demand curve and the aggregate supply curve to the left.

Question

Quizplus · Accepted Answer

When households become more future-oriented and save more, their consumption expenditure decreases. This leads to a decrease in aggregate demand as consumption is a component of the aggregate demand. Therefore, the aggregate demand curve shifts to the left. It does not affect aggregate supply as firms do not have any reason to produce less just because households are saving more.

Suppose Households Become More Future-Oriented and Decide to Save More