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

In a standard aggregate demand and aggregate supply model, which of the following would shift the aggregate demand curve to the right?

A cut in the policy interest rate that raises business investment shifts aggregate demand to the right, because investment is a component of aggregate demand. The other options raise costs or reduce productive capacity, so they shift aggregate supply to the left instead.

  1. AA rise in the cost of imported crude oil used by firms
  2. BA cut in the policy interest rate that raises business investmentCorrect
  3. CAn increase in the legal minimum wage
  4. DA fall in the productivity of labour across the economy
  5. A reduction in the size of the working-age population

Explanation

Lower interest rates reduce the cost of borrowing and stimulate investment, which is a component of aggregate demand, so AD shifts right. Higher oil costs, a higher minimum wage, lower productivity and a smaller workforce all raise costs or reduce capacity, which affects aggregate supply and shifts it left.

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