Multiple Choice
When considering factors that shift demand curves, which of the following will increase demand?
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3. The Market Forces of Supply and Demand
Shifts in the Demand Curve
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The aggregate demand curve will shift to the ______ when there is a reduction in government purchases.
A
downward
B
right
C
left
D
upward
Verified step by step guidance1
Understand that the aggregate demand (AD) curve represents the total quantity of goods and services demanded across all levels of an economy at different price levels.
Recall that government purchases are a component of aggregate demand, specifically part of the formula: \(AD = C + I + G + (X - M)\), where \(G\) stands for government spending.
Recognize that a reduction in government purchases (\(G\)) means a decrease in one of the components of aggregate demand, which lowers the overall demand at every price level.
Since aggregate demand decreases, the entire AD curve shifts to the left, indicating a lower quantity of goods and services demanded at each price level.
Therefore, the correct interpretation is that a reduction in government purchases causes the aggregate demand curve to shift to the left.
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