ECONOMICS
AGGREGATE DEMAND
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Question
[CLICK ON ANY CHOICE TO KNOW THE RIGHT ANSWER]
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changing the quantity of money
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changing the tax rate
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changing the level of government purchases of final goods and services
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changing the level of government transfers
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Detailed explanation-1: -Government Purchases are all the direct expenditures on final goods and services by the Government. We will refer to this as G. By changing G or net taxes T the government can change equilibrium income (Y). This is called fiscal policy.
Detailed explanation-2: -The only government (fiscal) policy that has a DIRECT effect on the aggregate demand curve is: changing the level of government purchases of final goods and services. If the government lowers income taxes in response to a recession, the government is engaging in what economists call: fiscal policy.
Detailed explanation-3: -The tax cut, by increasing consumption, shifts the AD curve to the right.
Detailed explanation-4: -An increase in government spending or a cut in taxes that leads to a rise in consumer spending can also shift AD to the right.
Detailed explanation-5: -First, if the government increases its purchases but keeps taxes constant, it increases demand directly. Second, if the government cuts taxes or increases transfer payments, households’ disposable income rises, and they will spend more on consumption. This rise in consumption will in turn raise aggregate demand.