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IAI Actuarial Core Principles · Business Economics · Business activity, unemployment and inflation

In a standard aggregate demand and aggregate supply diagram, which of the following would cause a movement along the aggregate demand curve rather than a shift of the curve?

A rise in the general price level causes a movement along the aggregate demand curve because it changes the real value of money balances. The other options change expenditure at any given price level, so they shift the whole curve instead.

  1. AA rise in the general price level that reduces the real value of households' money balancesCorrect
  2. BA cut in the personal income tax rate
  3. CAn increase in government spending on infrastructure
  4. DA depreciation of the rupee that raises export demand
  5. A rise in business confidence that increases planned investment

Explanation

A change in the general price level moves the economy along a given AD curve, through wealth, interest rate and trade effects. Tax cuts, government spending, exchange rate changes and confidence alter planned expenditure at every price level, so they shift the curve.

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