Lets say the government decides to decrease taxes. This leads to an increase in consumption because households have more disposable income.

10. Taxes and Consumption Lets say the government decides to decrease taxes. This leads to an increase in consumption because

10. Taxes and Consumption

Lets say the government decides to decrease taxes. This leads to an increase in consumption because households have more disposable income. How would you represent this tax decrease in an aggregate demand-supply curve?

There is no change in aggregate demand.

The aggregate demand curve shifts to the right.

The aggregate demand curve shifts to the left.

We cannot be sure.

Expert Solution

Option 2. The aggregate demand curve shifts to the right.

Explanation: Higher disposable income would lead to higher quantity demanded at each given price. This would lead to a shift in the aggregate demand curve.

Rahul Sunny answered 2 years ago

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