Government spending and taxes
A)do not change aggregate demand.
B)are an important component of aggregate supply.
C)do not play a big role in determining GDP.
D)are a major determinant of aggregate demand.
E)cannot affect the price level.

Question

Quizplus · Accepted Answer

Government spending and taxes can have a significant impact on aggregate demand, which is a key determinant of GDP. An increase in government spending or decrease in taxes would increase disposable income and therefore, consumer spending, which would in turn increase aggregate demand. Conversely, a decrease in government spending or increase in taxes would decrease disposable income and consumer spending, leading to a decrease in aggregate demand. Therefore, government spending and taxes play a major role in determining the level of aggregate demand and ultimately, GDP.

Government Spending and Taxes