Shifts in Aggregate Demand and Aggregate Supply Curves

Steps:

• Identify X and Y as equilibrium points on an AD-AS graph, where a movement indicates a change in equilibrium due to curve shifts.
• Analyze factors affecting AD: lower income tax increases disposable income and consumption, shifting AD right.
• Analyze factors affecting AS: lower production costs reduce expenses for firms, shifting AS right.
• Combined rightward shifts in AD and AS move equilibrium from X (lower output/price) to Y (higher output, ambiguous price effect).

Why A is correct:

• Decreases in income tax and production costs shift both AD and AS rightward, per the AD-AS model, expanding output to point Y.

Why the others are wrong:

• B: Increases shift AD and AS left, contracting output opposite to X-to-Y movement.
• C: Higher interest rates shift AD left (less investment), while lower costs shift AS right; net effect contracts output.
• D: Both increases shift AD and AS left, contracting output away from Y.

Final answer: A