ECONOMICS
AGGREGATE DEMAND
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Question
[CLICK ON ANY CHOICE TO KNOW THE RIGHT ANSWER]
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Decrease taxes, which shift aggregate demand to the right.
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Decrease taxes, which shift aggregate demand to the left.
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Decrease government spending, which shifts aggregate demand to the right.
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Decrease government spending, which shifts aggregate demand to the left
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Detailed explanation-1: -According to Keynesian economics, increased government spending raises aggregate demand and increases consumption, which leads to increased production and faster recovery from recessions.
Detailed explanation-2: -The crowding out effect theory suggests that rising public sector spending drives down private sector spending. To spend more, the government needs more revenue, which it gets through higher taxes and/or sales of Treasuries. This can reduce private sector income and loan demand, thus decreasing spending and borrowing.
Detailed explanation-3: -The crowding-out effect: The crowding-out effect works in the opposite direction of the multiplier. An increase in government purchases (as in the case above) raises incomes, which shifts the demand for money to the right. This raises the interest rate, which lowers investment.
Detailed explanation-4: -An increase in the interest rate increases the opportunity cost of holding money and leads to a reduction in the quantity of money demanded. 2. An increase in the level of real GDP increases the volume of transactions and leads to an increase in the quantity of money demanded.