If the government announces a cut in the capital gains tax and it is expected that investment spending will increase as a result,which of the following are also likely?

Question

Quizplus · Accepted Answer

A cut in capital gains tax is likely to increase investment spending, which will lead to an increase in aggregate expenditure. This will cause an upward shift in the aggregate expenditure line. As investment spending increases, there will be a higher demand for money. This will cause a rightward shift of the money demand curve. When there is an increase in investment spending, the aggregate demand curve will shift to the right. Therefore, overall, there will be an upward shift in the aggregate expenditure line, a rightward shift of the money demand curve, and a rightward shift of the aggregate demand curve. The correct answer is E.

If the Government Announces a Cut in the Capital Gains