Question

What is an appropriate government response to shift aggregate demand back to ADf? Select all that...

What is an appropriate government response to shift aggregate demand back to ADf?

Select all that apply:

  • enact tax increases

  • increase direct government spending

  • decrease direct government spending

  • enacting tax cuts

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Answer #1

Option a and c are correct. Increase in tax rate and decrease in government spending leads to backward shift of aggregate demand curve.

Increase in tax rate reduces the disposable income, after tax wages, after tax investment return will decline. It results fall in production and output level. Thereby it reduces consumption, investment and net exports. It reduces the aggregate demand for good and services

Decrease in government spending will increase income inequality. It will also shify AD curve leftward.

Option b and d are wrong. Because increase in goverment spending and tax cuts increase aggregate demand and shifts AD curve rightward

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