If the government increased autonomous net taxes by $60 million and increased its own purchases by the same amount, we would expect the net effect of these actions to be
A)an increase in aggregate demand, which is a rightward shift of the aggregate demand curve
B)an increase in aggregate demand, which is a leftward shift of the aggregate demand curve
C)a decrease in aggregate demand, which is a rightward shift of the aggregate demand curve
D)a decrease in aggregate demand, which is a leftward shift of the aggregate demand curve
E)to leave the aggregate demand curve unchanged

Question

Quizplus · Accepted Answer

Increasing government purchases increase aggregate demand, as it increases demand for goods and services in the economy. Increasing net taxes (which is taxes collected by the government minus transfer payments) decreases disposable income and therefore consumption, which would decrease aggregate demand. However, since the question specifies "autonomous" net taxes, which implies that it is not offset by any changes in transfer payments, the increase in government purchases would fully offset the increase in net taxes, resulting in a net increase in aggregate demand and a rightward shift of the aggregate demand curve.

If the Government Increased Autonomous Net Taxes by $60 Million