Question

In: Economics

Aggregate demand shifts left when the government

Aggregate demand shifts left when the government


Select one: 

a. decreases taxes. 

b. cuts military expenditures 

c. creates a new investment tax credit 

d. None of the above is correct.

Solutions

Expert Solution

Shifting of aggregate demand to its left indicates a decrease in the aggregate demand.

AD = C + I + G + NX

When the government decreases taxes, the disposable income of people in the economy increases. An increase in the disposable income leads to an increase in consumption(C) and hence, the aggregate demand should increase. Option 1 is incorrect

When the government cuts military expenditures, the component of government expenditures (G) in the aggregate demand decreases. Therefore, aggregate demand should decrease. Option 2 is correct

When the government creates a new investment tax credit, it acts as an incentive to the investors to increase their investment and hence the investment component (I) of the aggregate demand increases and hence, the aggregate demand should decrease. Option 3 is incorrect

Ans: b. cuts military expenditures

Rahul Sunny answered 2 years ago
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