Question

In an aggregate demand-aggregate supply diagram, equal decreases in government spending and taxes will Group of...

In an aggregate demand-aggregate supply diagram, equal decreases in government spending and taxes will

Group of answer choices

not affect the AD curve.

increase the equilibrium GDP.

shift the AD curve to the left.

shift the AD curve to the right.

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Answer #1

A decrease in government spending leads to decrease in aggregate demand.

A decrease in taxes leads to increase in aggregate demand.

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But the impact of decrease in government spending on aggregate demand will be higher than the impact of decrease in taxes on aggregate demand. It means, the decrease in aggregate demand will higher than increase in aggregate demand. Hence, the net impact will be decrease in aggregate demand, which will shift the AD curve to the left.

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It means a equal decreases in government spending and taxes will shift the aggregate demand curve to the left.
Answer: Option (C) i.e., shift the aggregate demand curve to the left

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