Assume an economy experiences an increase in productivity that occurs as a result of a more widespread implementation of a major technological breakthrough. Given this information, we would expect which of the following to occur?
A) Aggregate demand would shift to the left.
B) Aggregate demand would not change.
C) Aggregate demand would shift to the right.
D) Both the aggregate demand and aggregate supply curves would shift to the right.
E) Both the aggregate demand and aggregate supply curves would shift to the left.

Question

Quizplus · Accepted Answer

An increase in productivity leads to a decrease in costs of production, allowing firms to produce and sell more output at lower prices. This leads to an increase in aggregate supply, shifting the aggregate supply curve to the right. As a result, the economy experiences an increase in real output and a decrease in the price level. With a lower price level, consumers have a higher real purchasing power and tend to buy more goods and services, leading to an increase in aggregate demand. Therefore, we would expect a shift of the aggregate demand curve to the right.

Assume an Economy Experiences an Increase in Productivity That Occurs