Using the aggregate demand-aggregate supply model, predict what happens in the short run when the federal government enacts a cut in the personal income tax rates.
A) The aggregate supply curve shifts right; the aggregate demand curve is not affected; price level decreases; real GDP increases.
B) The aggregate supply curve shifts left; the aggregate demand curve is not affected; price level increases; real GDP decreases.
C) The aggregate demand curve shifts right; the aggregate supply curve is not affected; price level and real GDP increase.
D) The aggregate demand curve shifts left; the aggregate supply curve is not affected; price level and real GDP decrease.

Question

Quizplus · Accepted Answer

When the federal government enacts a cut in the personal income tax rates, individuals have more disposable income to spend, leading to an increase in consumption and investment, which in turn increases aggregate demand. As a result, the aggregate demand curve shifts rightward, leading to an increase in price level and real GDP. The aggregate supply curve remains unchanged in the short run. Therefore, option C is the best choice.

Using the Aggregate Demand-Aggregate Supply Model, Predict What Happens in the Short