What happens to aggregate demand if people want to save more for retirement and the government raises taxes?

a. Aggregate demand shifts right.

b. Aggregate demand shifts left.

c. If people save more, aggregate demand shifts left: if the government raises taxes, aggregate demand shifts right.

d. If people save more, aggregate demand shifts right; if the government raises taxes, aggregate demand shifts left.

Solutions

Expert Solution

Answer) When people want to save more for retirement then they consume less and inturn decrease in AD and hence leftward shift in AD curve. And when government raises taxes it will reduce disposable income and leads to decrease in income and hence decrease in AD which inturn leads to leftward shift in AD.

So, option b) is correct.

Rahul Sunny answered 1 year ago

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