8: A decrease in consumption and a leftward shift of the AD curve is most likely caused by:
(A) an increase in interest rates.(A) is incorrect because a change in interest rates when the money supply is held constant would move the economy along the curve. (B) is the wealth effect and is the correct answer. (C) is the wealth effect but would move the curve to the right, not left. (D) Expectations shift the curve too because people will buy now. (I'm not sure that the AD curve moves because the Phillips Curve shows that the AS curve can move to the left.) (E) A decrease in income taxes would shift the AD curve to the right.
(B) a decrease in physical wealth.
(C) an increase in financial wealth.
(D) expectations of rising inflation.
(E) a decrease in taxes.
AmosWEB answer A, which is the interest rate effect and a reason for the downward sloping AD curve. If the interest rate changes and everything else stays the same, then there would be a change in quantity of aggregate demand. The question wants a shift in the curve so the underlying fundamentals had to change such as a change in the money supply or wealth.