How is aggregate expenditure affected when net taxes are cut?
A) Government purchases fall.
B) Government purchases rise.
C) Consumption falls.
D) Consumption rises.

Question

How is aggregate expenditure affected when net taxes are cut?  
A) Government purchases fall. 
B) Government purchases rise. 
C) Consumption falls. 
D) Consumption rises.

Quizplus · Accepted Answer

Net taxes directly affect disposable income, which is income minus taxes. When net taxes are cut, disposable income increases, which leads to an increase in consumption. As consumption is a component of aggregate expenditure, it leads to an increase in aggregate expenditure.

How Is Aggregate Expenditure Affected When Net Taxes Are Cut