Question 6

Lower interest rates can cause a rightward shift of AD in the short run.

Lower interest rates make borrowing cheaper, which can stimulate investment and consumption, leading to an increase in aggregate demand (AD) in the short run.

A) Higher tax rates

Higher tax rates generally reduce disposable income for consumers and lower profits for businesses, leading to decreased consumption and investment. This would actually shift the aggregate demand curve to the left, not to the right.

B) Higher production costs

Higher production costs typically result in decreased supply as firms may reduce output due to lower profitability. This situation can lead to a leftward shift in aggregate supply and may not influence the aggregate demand positively, thus not causing a rightward shift in AD.

C) Higher imports

Higher imports can lead to a decrease in domestic demand for goods and services, as consumers may choose foreign products over domestic ones. This scenario would result in a leftward shift of the aggregate demand curve rather than a rightward shift.

D) Lower interest rates

Lower interest rates encourage borrowing and spending by consumers and businesses, leading to an increase in investment and consumption. This increase directly contributes to a rightward shift of the aggregate demand curve in the short run.

Conclusion

The correct answer, lower interest rates, effectively stimulates aggregate demand through increased spending and investment. The other options, such as higher tax rates, higher production costs, and higher imports, either reduce demand or shift it leftward, demonstrating why they do not contribute to a rightward shift in aggregate demand.