An increase in investment spending because companies become more optimistic about investment profitability causes the aggregate demand function to shift ________, the equilibrium level of aggregate output to rise, and the IS curve to shift to the ________, everything else held constant.
A) up; left
B) up; right
C) down; left
D) down; right

Question

Quizplus · Accepted Answer

An increase in investment spending will lead to a shift in the aggregate demand function to the right, as there will be a higher level of demand for goods and services. This will cause the equilibrium level of aggregate output to rise. The IS curve will shift to the right because at every level of interest rates, there is now a higher level of output demanded. Therefore, the correct answer is option B.

An Increase in Investment Spending Because Companies Become More Optimistic