If firms' expectations about the future become pessimistic so that they think future profits will be lower, then
A) the quantity of real GDP demanded decreases, and there is a movement up along the AD curve.
B) aggregate demand decreases and the AD curve shifts leftward.
C) aggregate demand increases and the AD curve shifts rightward.
D) the aggregate demand curve does not shift, but potential GDP decreases.
E) the quantity of real GDP demanded increases, and there is a movement down along the AD curve.

Question

Quizplus · Accepted Answer

When firms expect future profits to be lower, they are likely to reduce investment spending, which decreases aggregate demand. This leads to a leftward shift of the aggregate demand (AD) curve, not just a movement along the curve.

If Firms' Expectations About the Future Become Pessimistic So That