ECONOMICS
AGGREGATE DEMAND
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Question
[CLICK ON ANY CHOICE TO KNOW THE RIGHT ANSWER]
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AS will decrease
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AS will increase
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AD will increase
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unemployment will increase
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Detailed explanation-1: -Income taxes affect the consumption component of aggregate demand. An increase in income taxes reduces disposable personal income and thus reduces consumption (but by less than the change in disposable personal income).
Detailed explanation-2: -The balanced-budget multiplier is equal to 1 and can be summarized as follows: when the government increases spending and taxes by the same amount, output will go up by that same amount.
Detailed explanation-3: -In the Keynesian cross, the tax increase shifts the planned expenditure function down by MPC x ∆T. The amount by which Y falls is given by the product of the tax multiplier and the increase in taxes: ∆Y = [-MPC/(1-MPC)]∆T.
Detailed explanation-4: -Keynes recognized that the government budget offered a powerful tool for influencing aggregate demand. Not only could aggregate demand be stimulated by more government spending-or reduced by less government spending-but consumption and investment spending could be influenced by lowering or raising tax rates.