Rightward AD Shift Raises Price Level

Steps:

• Examine diagram for changes in AD and AS curves over the year.
• Identify rightward AD shift, increasing equilibrium output and price level.
• Rule out leftward shifts or AS changes that mismatch observed rise in prices.
• Match shift cause to options affecting demand components.

Why A is correct:

• Boom in consumer spending (C component of AD) shifts AD right, raising price level per AD-AS model where P = f(AD quantity).

Why the others are wrong:

• B: Higher profit taxes reduce investment (I), shifting AD left and lowering prices.
• C: Reduced government projects cut G, shifting AD left and lowering prices.
• D: Rising raw material costs shift short-run AS left, raising prices but reducing output.

Final answer: A