Question

27) Which of the following would shift up the aggregate demand (AD) curve? A) higher interest rates B) lower government expenditures C) lower tax rates D) higher exchange rate (higher value of US dollar) E) an increase in the price level

Answer 1

Option 'C' is correct.

An increase in price level will move along the curve and won't shift the curve so option e is incorrect.

Higher exchange rate means higher value of dollar and one would have to pay more in terms of dollar to buy from USA so USA export would decrease or demand would decrease outside the country and will shift left/down the curve rather than shifting up the curve so Option d is also incorrect.

Lower government expenditure means government is buying less so demand is less hence aggregate demand curve shifts left/down instead of shifting upward so option b also incorrect.

Also, when interest rate rises , borrowing decreases, demand decreases and aggregate demand curve shifts left/down rather than shifting up. So option 'A' also incorrect.

Option 'C' is correct. Lower taxes means people having more money, disposable income increases, their ability to spend increase, hence demand increases and this shifts the aggregate demand curve upward.