How does a change in taxes primarily affect aggregate demand?
A)a tax change alters disposable income and consumption spending
B)a tax change alters exports and net exports
C)a tax change alters investment by an equal and opposite amount
D)a tax change alters government purchases by an equal amount

Question

Quizplus · Accepted Answer

A change in taxes primarily affects aggregate demand by altering disposable income and consumption spending. When taxes are increased, disposable income decreases, and consumers have less money to spend, leading to a decrease in consumption spending and, therefore, a decrease in aggregate demand. Conversely, when taxes are decreased, disposable income increases, and consumers have more money to spend, leading to an increase in consumption spending and, therefore, an increase in aggregate demand.

How Does a Change in Taxes Primarily Affect Aggregate Demand