Based on the following diagram answer the question :
Identify the reason for shifting of the Aggregate Demand (AD) curve from $AD^1$ to $AD^2$.
Answer & explanation
Correct answer: option 4
The correct answer is option (4) : Increase in investment
When autonomous investment increases, the $AD^1$ line shifts in parallel upwards and assumes the position $AD^2$
(1) Increase in savings by households : This would generally lead to a decrease in consumption spending, causing the AD curve to shift to the left.
(2) Increase on taxes by government : An increase in taxes typically reduces disposable income, leading to a decrease in consumer spending. This would shift the AD curve to the left.
(3) Increase in imports : An increase in imports means that more spending is going toward foreign-produced goods and services, reducing domestic demand. This would lead to a leftward shift of the AD curve.
(4) Increase in investment : An increase in investment typically leads to higher levels of spending and economic activity. This would shift the AD curve to the right.