Answer to Question #36834 in Macroeconomics for raju

Question

Explain what happens to the AD curve if personal income taxes decline?

Answer 1

Increase in consumer spending is the component of aggregate demand that is affected if personal income taxes fall. This will cause aggregate demand to rise because reduction in personal income tax rates raises take-home income and increases consumer purchases at each possible price level. Tax cuts shift the aggregate demand curve to the right. Tax increases reduce consumption spending and shift the curve to the left.