Multiple Choice
The aggregate demand curve will shift to the ______ when there is a reduction in government purchases.
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3. The Market Forces of Supply and Demand
Shifts in the Demand Curve
Multiple Choice
In the context of shifts in the demand curve, what is the relationship between consumers' expectations of future prices and current demand?
A
If consumers expect higher prices in the future, current demand increases (demand shifts right).
B
If consumers expect higher prices in the future, current demand decreases (demand shifts left).
C
Expectations of future prices affect only the current quantity demanded (a movement along the demand curve), not current demand.
D
Expectations of future prices affect current demand only if the current price changes.
Verified step by step guidance1
Step 1: Understand the difference between a movement along the demand curve and a shift of the demand curve. A movement along the demand curve occurs when the price of the good changes, affecting the quantity demanded. A shift of the demand curve happens when factors other than the current price change, altering demand at every price level.
Step 2: Identify that consumers' expectations about future prices are a non-price determinant of demand. This means that if consumers expect prices to rise in the future, they may change their current purchasing behavior.
Step 3: Analyze the effect of expecting higher future prices. If consumers anticipate that prices will be higher later, they are likely to buy more now to avoid paying more later, which increases current demand and shifts the demand curve to the right.
Step 4: Conversely, if consumers expect prices to fall in the future, they may delay purchases, decreasing current demand and shifting the demand curve to the left.
Step 5: Conclude that expectations of future prices affect current demand by shifting the demand curve, not just the quantity demanded, and this effect occurs independently of changes in the current price.
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