Assume that an economy is in long-run equilibrium. Increased expectations for future profits cause an unexpected surge in investment. This increased investment would shift the ______ curve, causing real GDP to _______________ in the short run.

• A. AD, rise
• B. AD, fall
• C. SRAS, rise
• D. SRAS, fall

Answer: (A)

Verified step by step guidance

1. Step 1: Understand the components of aggregate demand (AD) and aggregate supply (AS). Aggregate demand represents the total spending on goods and services in an economy, while aggregate supply represents the total output firms are willing to produce at different price levels.
2. Step 2: Recognize that an increase in expected future profits typically encourages firms to invest more. Investment is a component of aggregate demand, so an increase in investment shifts the aggregate demand curve.
3. Step 3: Identify which curve shifts. Since investment is part of aggregate demand, the aggregate demand (AD) curve shifts to the right (increases). The short-run aggregate supply (SRAS) curve does not shift immediately due to changes in investment expectations.
4. Step 4: Analyze the short-run effect on real GDP. A rightward shift in the AD curve leads to an increase in the overall demand for goods and services, which causes real GDP to rise in the short run.
5. Step 5: Summarize the conclusion: Increased expectations for future profits cause an unexpected surge in investment, shifting the AD curve to the right and causing real GDP to rise in the short run.