Question

For each event listed below, describe your expectations as to how the event would influence the aggregate demand for final goods and services produced in the U.S. Write INCREASE, DECREASE or NO EFFECT, and then support your answer with economics rationale. For analysis purposes, assume the event described is the only factor influencing aggregate demand.

a) Throughout the U.S 48 out of the 50 states lower personal income rates

b) Germany, Spain, and other countries in the Eurozone, major trading partners with the U.S., experience a significant decrease in real GDP

c) Despite no change in the expected inflation rate, nominal interest rates in the U.S, increase significantly.

Answer 1

a) A lower personal income tax will increase the disposable income and that will increase the aggregate demand in the market. It will shift the demand curve to the right and the new equilibrium will be at a higher price and higher output. The answer is "increase".

b) it will decrease the aggregate demand because it will decrease the exports and exports are part of the aggregate demand.

c) It will decrease the aggregate demand because it will increase the opportunity cost of spending, people will save more.