Answer to Question #247012 in Macroeconomics for Juan

Question

Government can increase aggregate demand by…

•  A. increasing tax rates.
•  B. increasing the interest rate.
•  C. decreasing income taxes.
•  D. decreasing government spending.

Answer 1

Solution:

The correct answer is C. decreasing income taxes.

Government can increase aggregate demand by decreasing income taxes. Lowering income taxes raises an individual’s disposable income, allowing the consumers to spend additional funds. The extra funds will allow consumers to increase their consumption by demanding more goods and services and investments, hence increasing GDP. The aggregate demand curve will shift to the right as consumption and investment increase, resulting in an increase in real GDP and price levels.