A decrease in expected returns on investment will most likely shift the AD curve to the: A) Right because C will increase B) Left because C will decrease C) Right because I_g will increase D) Left because I_g will decrease

Question

Quizplus · Accepted Answer

A decrease in expected returns on investment will lead to a decrease in investment spending, which will cause a decrease in aggregate demand (AD). This is because investment spending is a component of AD. The decrease in investment spending will also cause a decrease in the equilibrium level of output and income in the economy, which will shift the IS curve to the left (I_g will decrease). As a result, the AD curve will shift to the left.

A Decrease in Expected Returns on Investment Will Most Likely