Exhibit 11-8 Aggregate demand and supply curves In Exhibit 11-8, supply-siders claimed that the shift from AS₁ to AS₂ would occur if the government: A) increased tax rates and increased the amount of government regulation. B) increased tax rates and decreased the amount of government regulation. C) decreased tax rates and increased the amount of government regulation. D) decreased tax rates and decreased the amount of government regulation.

Question

Quizplus · Accepted Answer

The shift from AS₁ to AS₂ would occur if the government decreased tax rates and decreased the amount of government regulation. This is because a decrease in tax rates would lead to more disposable income for individuals and businesses, increasing their willingness to spend and invest, which would shift the aggregate demand (AD) curve to the right. Additionally, a decrease in government regulation would reduce the cost of production and incentivize businesses to produce more, which would shift the aggregate supply (AS) curve to the right. Together, this would result in an increase in both real GDP and price level, leading to the new equilibrium point at a higher price level and higher output level.

Exhibit 11-8 Aggregate Demand and Supply Curves