C) A cut in personal and business taxes will shift AD1 to AD2.
The aggregate demand curve is given and the shift is shown.
As the components of aggregate demand—consumption spending, investment expenditure, government spending, and spending on exports minus imports—increase, the aggregate demand curve, or AD curve, moves to the right. With the decline of these components, the AD curve will turn back to the left.
Different individual decisions, such as those brought on by changes in consumer or corporate confidence, or political decisions, such as adjustments in government spending and taxation, can cause AD components to alter.
The equilibrium output quantity and price level will increase if the AD curve moves to the right. The equilibrium output quantity and price level will decrease if the AD curve moves to the left.
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