ECONOMICS
AGGREGATE DEMAND
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Question
[CLICK ON ANY CHOICE TO KNOW THE RIGHT ANSWER]
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Decreases taxes
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Cuts military expenditures
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Both of the above are correct
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None of the above is correct
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Detailed explanation-1: -The aggregate demand curve tends to shift to the left when total consumer spending declines. 2 Consumers might spend less because the cost of living is rising or because government taxes have increased. Consumers may decide to spend less and save more if they expect prices to rise in the future.
Detailed explanation-2: -Higher government spending causes AD to shift to the right-see Diagram A, on the left above-while lower government spending will cause AD to shift to the left-see Diagram B, on the right above. Tax policy can affect consumption and investment spending as well.
Detailed explanation-3: -Increased government spending is likely to cause a rise in aggregate demand (AD). This can lead to higher growth in the short-term. It can also potentially lead to inflation.
Detailed explanation-4: -In contrast, a reduction in government purchases would reduce aggregate demand. The aggregate demand curve shifts to the left, putting pressure on both the price level and real GDP to fall.