How do tax cuts and government expenditure affect aggregate demand?
A) Both shift aggregate demand right.
B) Both shift aggregate demand left.
C) Tax cuts shift aggregate demand right; government expenditure shifts aggregate demand left.
D) Tax cuts shift aggregate demand left; government expenditure shifts aggregate demand right.

Question

Quizplus · Accepted Answer

Tax cuts and government expenditure both have expansionary effects on the economy, meaning they increase aggregate demand. Tax cuts put more money in the hands of consumers, giving them more money to spend, while government expenditure injects money directly into the economy through infrastructure projects, public programs, etc. Both of these factors lead to increased consumer and business spending, which leads to an increase in aggregate demand. Therefore, both tax cuts and government expenditure shift aggregate demand right.

How Do Tax Cuts and Government Expenditure Affect Aggregate Demand