Question 20

The aggregate demand curve shifts right when discretionary spending increases.

An increase in discretionary spending leads to greater consumer demand for goods and services, which in turn shifts the aggregate demand curve to the right, indicating an increase in overall economic activity.

A) Shifts left

This option is incorrect because an increase in discretionary spending does not reduce overall demand; rather, it encourages more spending in the economy. A leftward shift would signify a decrease in aggregate demand, which contradicts the effects of increased spending.

B) Remains unchanged

This option is also incorrect since an increase in discretionary spending directly affects consumer behavior and overall demand levels. The aggregate demand curve will not remain unchanged; it will respond to the increase in spending by shifting right.

C) Becomes horizontal

This option is incorrect because the aggregate demand curve does not become horizontal as a result of increased discretionary spending. A horizontal curve would suggest that price levels do not change despite variations in output, which is not the case when demand increases.

D) Shifts right

This option is correct because an increase in discretionary spending leads to higher consumption, which boosts aggregate demand. As consumers spend more, the overall demand in the economy increases, resulting in a rightward shift of the aggregate demand curve.

Conclusion

The correct answer is that the aggregate demand curve shifts right when discretionary spending increases. This is due to the stimulating effect of increased consumer spending on overall economic activity, which is not represented by any of the other options. Each of the incorrect options misrepresents the relationship between discretionary spending and aggregate demand.