Using the aggregate demand-aggregate supply model, predict what happens in the short run when the federal government lowers the capital gains tax to stimulate investment.
A) The aggregate demand curve shifts left; the aggregate supply curve is not affected; price level and real GDP decrease.
B) The aggregate demand curve shifts right; the aggregate supply curve is not affected; price level and real GDP increase.
C) The aggregate supply curve shifts left; the aggregate demand curve is not affected; price level increases; real GDP decreases.
D) The aggregate supply curve shifts right; the aggregate demand curve is not affected; price level decreases; real GDP increases.

Question

Quizplus · Accepted Answer

Lowering the capital gains tax encourages investment, increasing the level of aggregate demand. This shift in AD causes a movement along the aggregate supply curve, resulting in an increase in both the price level and real GDP in the short run. Therefore, the correct answer is B.

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