ECONOMICS (CBSE/UGC NET)

Detailed explanation-1: -Incomes will rise, resulting in higher consumption. The increased spending raises the aggregate price level.

Detailed explanation-2: -The economy experiences increased interest rates due to reduced government spending, eventually causing inflation in the long run.

Detailed explanation-3: -When government spending decreases, regardless of tax policy, aggregate demand decrease, thus shifting to the left. The fourth term that will lead to a shift in the aggregate demand curve is NX(e).

Detailed explanation-4: -Decreasing government spending tends to slow economic activity as the government purchases fewer goods and services from the private sector. Increasing tax revenue tends to slow economic activity by decreasing individuals’ disposable income, likely causing them to decrease spending on goods and services.

Detailed explanation-5: -The correct answer to the given question is option c. An increase in income taxes. An increase in income taxes leads to decrease in disposable income for consumers thereby dampening the aggregate demand for goods and services.