For a given inflation rate, if bright prospects for the future of the economy cause businesses to increase their spending on new capital, then the ______ shifts _____.
A) aggregate demand curve; right
B) aggregate demand curve; left
C) aggregate supply curve; upward
D) aggregate supply curve; downward

Question

Quizplus · Accepted Answer

An increase in business spending on new capital will shift the aggregate demand curve to the right, as it will increase overall demand in the economy at each price level. This will lead to higher prices and output, which is consistent with the relationship between aggregate demand and inflation. Option C is incorrect because an increase in aggregate supply would result from an improvement in technology, which would shift the aggregate supply curve upward. Option D is incorrect because a decrease in aggregate supply would lead to stagflation, where prices rise even as output falls, which is not consistent with the situation described in the question. Option B is incorrect because a shift to the left in the aggregate demand curve would indicate a decrease in overall demand, not an increase as suggested in the question.

For a Given Inflation Rate, If Bright Prospects for the Future