Which of the following would NOT cause the AD curve to shift to the right? The d

Question

Which of the following would NOT cause the AD curve to shift to the right? The dollar depreciates relative foreign currencies Technological innovations increase investment spending O An increase in taxes decreases disposable income The government increases social program spending QUESTI 10 points Save Answer Why are prices and wages sticky even when aggregate demand changes? T T T Arial Path: p Words:0 QUESTI 10 points Save Answer Why might an increase in government spending actually increase GDP more than proportionately? TTIArial ,

Explanation / Answer

Correct Answer:
C
Decrease in disposable income, will cause the AD curve to shift to the left.

1.
Prices and wages are stick in nature, because it cannot be changed in the short run even if the aggregate demand changes. Price does not change, because of the different reasons. One reason is the menu cost associated with the product. The second reason is the elasticity of demand. The third reason is the presence of substitutes who can take away the consumers.
Wages are sticky, because it is given on the basis of contractual agreement. Here, it is the nominal wage that is fixed, but its real value changes with change in the inflation rate.

2.
Government spending has multiplier effects that causes more than the proportionate change in GDP. When government spending takes place for the first time, then it becomes the income of others. This income is spent on the basis of marginal propensity to consume (MPC) and it becomes the income of some other person. This way, the spending continues and create multiplier effect.
For example,
If MPC = .8
Then,
Spending multiplier = 1/(1-MPC) = 1/(1-.8) = 5
It means that 1 dollar spent by the government, will create 5 dollar GDP increase.

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