Suppose in 2012 in New Zealand, there are deflationary pressures and prices drop by 20 percent throughout the economy. All else being equal, expectations of increasing deflation should:

B. shift the AD curve to the left

Explanation:

When people expect that deflation which is the general reduction in prices, will occur, they will try to take advantage of it by reducing their consumption in the present so that they can resume consumption when prices are lower so as to reduce their cost of consumption.

This will have the effect of reducing Aggregate Demand which will force the Aggregate Demand curve to the Left which will further exacerbate the effects because prices will then fall to the new point of intersection between AD and the Aggregate Supply curve.

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