Why does a tax change affect aggregate demand?
A) A tax change alters saving by an equal amount.
B) A tax change alters imports and net exports.
C) A tax change alters government spending by an equal amount.
D) A tax change alters disposable income and consumption spending.

Question

Quizplus · Accepted Answer

A tax change affects disposable income, which is the income available after taxes, and consumption spending. If taxes are lowered, disposable income increases, and people can spend more on goods and services, thereby increasing aggregate demand. On the other hand, if taxes are raised, disposable income decreases, and people have less money to spend, lowering aggregate demand. Therefore, a tax change affects aggregate demand by changing consumption spending.

Why Does a Tax Change Affect Aggregate Demand