Question

Explain whether the following government policies affect the aggregate demand curve or the short-run aggregate supply...

Explain whether the following government policies affect the aggregate demand curve or the short-run aggregate supply curve and how.

The government reduces the minimum nominal wage.

The government increases Temporary Assistance to Needy Families (TANF) payments, government transfers to families with dependent children.

To reduce the budget deficit, the government announces that households will pay much higher taxes beginning next year.

The government reduces military spending.

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Answer #1

The government reduces the minimum nominal wage.
Ans. The supply curve will shift to the right because input costs will fall.

The government increases Temporary Assistance to Needy Families (TANF) payments, government transfers to families with dependent children.
Ans. Aggregate demand will increase and curve will shift to the right as the disposable income of households increases.

To reduce the budget deficit, the government announces that households will pay much higher taxes beginning next year.
Ans. The disposable income of households will fall and the aggregate demand will shift to the left i.e AD will fall.

The government reduces military spending.
Ans. Fall in government spending will lead to fall in Aggregate Demand. AD curve will shift to the left.

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