Suppose the economy is operating at potential GDP. Then the federal government decides to implement a large tax cut.

Which curve shifts and in which direction?

aggregate demand shifts left

aggregate supply shifts right.

aggregate supply shifts left.

aggregate demand shifts right

Solutions

Expert Solution

A tax cut, increases the disposable income of the public. This leads to increase in purchasing power of the citizens, and hence the demand curve will be affected, and not the supply curve. Hence, the second and third option are incorrect. An increase in purchasing power will lead to an increase in demand i.e., a rightward shift of the demand curve. Hence, the right answer is the fourth option. The first option talks about a leftward shift, which happens when the tax rates rise, hence it is not correct in this scenario.

Rahul Sunny answered 1 year ago

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