A fall in investment expenditure by business is:
A) an AS shock that will shift AS down to the right, lowering equilibrium Y and P.
B) an AD shock that will shift AD to the left lowering equilibrium Y and P.
C) a fall in potential output that does not affect short run Y and P.
D) a shift in aggregate expenditure from investment to consumption that has no effect on AD or AS.

Question

Quizplus · Accepted Answer

A fall in investment expenditure by businesses is considered an aggregate demand (AD) shock because investment is a component of aggregate demand. When investment decreases, it directly reduces aggregate demand, leading to a leftward shift of the AD curve. This shift results in a lower equilibrium output (Y) and price level (P), as businesses produce less and prices adjust downward in response to the decreased demand for goods and services.

A Fall in Investment Expenditure by Business Is