Which is not a reason for a decrease in aggregate demand? Group of answer choices 1....

Which is not a reason for a decrease in aggregate demand?

Group of answer choices

1. Decrease in taxes

2. Increase in taxes

3..Decrease in income

4. Increase in interest rates

Solutions

Expert Solution

Hi there, Thank you for asking this question. I would like to answer by explaining the correct option along with the reasons the other options being incorrect .

The answer for your question is option (1) Decrease in taxes. It is because when taxes are reduced, consumption and disposable personal income will increase which will lead to Increase in AD.

Increase in Taxes will have an opposite effect from the required answer. Consumption and Disposable Personal Income will reduce and will lead to Decrease in AD.

Decrease in Income will lead to fall in consumption due to less income which will go to personal savings and lowers the demand for goods. This in the end lead to Decrease in AD.

Increase in Interest Rates will decrease the demand for investment as the cost of investment rises with interest rate. Therefore, an increase in the price level increases the interest rate, which decreases the demand for investment and thereby decreases Aggregate Demand.

Rahul Sunny answered 1 year ago

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