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For each of the following events, indicate whether the AD or the AS curve shifts.
Briefly explain the reasoning behind your choice.

a. The government increases defense spending.
b. Oil prices rise dramatically.
c. Stock prices and housing values fall. (Hint - this would decrease household wealth.)
d. Our largest trading partners experience rapid economic growth and rising incomes.
e. Businesses become optimistic about the economy.

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a. The government increases defense spending.
Since Y=C+G+I+NX, when G increases, the aggregate demand increases, and the AD curve shifts to the right.

b. Oil prices rise dramatically.
An increase in the price of an important input will raise the cost of ...

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