National Economics Challenge Practice Test

Question: 1 / 400

If business leaders in a firm revise their expectations downwards due to anticipated recession, what happens to aggregate demand?

Shifts rightwards due to increased business investment

Shifts leftwards as business investment spending adjusts

When business leaders revise their expectations downwards in anticipation of a recession, this typically leads to a reduction in their investment spending. Businesses forecast lower future profits and a tougher economic environment, which makes them more cautious about expanding or investing in new projects. As these expectations shift, firms are likely to cut back on capital expenditures, such as purchasing new equipment or expanding operations.

This decline in business investment directly impacts aggregate demand, which represents the total demand for goods and services within an economy. When investment decreases, it contributes to a leftward shift in the aggregate demand curve, indicating a reduction in overall demand for goods and services. Thus, the correct scenario illustrates that as businesses adjust their spending in response to lower expectations, aggregate demand shrinks accordingly.

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Remains unchanged as expectations stabilize

Shifts upwards because of increased consumer confidence

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