all Sprint WiFi 1146 AM Question 5 5 points Inflation m ASR

all Sprint Wi-Fi 11:46 AM Question 5 (5 points) Inflation (m) ASR Et ADE ADE Output ( Which of the following could explain the shift shov in the graph above. (Check all that apply.) A positive (beneficial supply shock such as an improvement in technology The Federal Reserve decides to target a lower inflation rate Consumer confidence falls, causing households to save more An increase in investor confidence An increase in government military outlays Save

Solution

5.

There are two possible answers – 4^th option, and 5^th option.

4^th option: AD is the sum total of consumption spending, investment spending, government spending, and net export. Increasing the confidence of investors, increases more investment at the same inflation level; it shifts the AD curve to the right.

5^th option: It increases government spending although there is no change in inflation, which requires the AD curve to shift towards right.

Other options are not correct:

1^st option: Supply shock shifts the AS curve, but not AD curve.

2^nd option: As per the graph there is no activity on inflation.

3^rd option: If there is more saving, AD can’t be shifted to the right.

6.

This is the demand shock in positive direction, which shifts the AD curve to right; if taxes are low, people would be having excess money in their hands for consumption purchase. Therefore, the probable new equilibrium would be at point D.

Answer: 4^th option