Scenario 14-1. The economy is in long-run equilibrium. Suddenly, due to improved international relations and the increased confidence of policymakers, citizens become more optimistic about the future and stay this way for a long time.
-Refer to Scenario 14-1. Initially, which curve shifts in which direction?
A)AD shifts right.
B)AD shifts left.
C)Short-run AS shifts right.
D)Short-run AS shifts left.

Question

Quizplus · Accepted Answer

Improved international relations and increased confidence of policymakers lead to increased optimism among citizens, which increases their spending and investment. This leads to an increase in aggregate demand (AD) as they demand more goods and services. Thus, the AD curve shifts rightwards. The long-run equilibrium is achieved when the AD curve intersects the vertical long-run aggregate supply (LRAS) curve.