An increase in business tax rates, combined with a decrease in consumer confidence, would have what effect on aggregate demand?
A)AD would increase.
B)AD would decrease.
C)AD would stay the same.
D)AD could either increase or decrease, depending on which change was of a greater magnitude.

Question

An increase in business tax rates, combined with a decrease in consumer confidence, would have what effect on aggregate demand?
A)​AD would increase.
B)​AD would decrease.
C)​AD would stay the same.
D)​AD could either increase or decrease, depending on which change was of a greater magnitude.

Quizplus · Accepted Answer

An increase in business tax rates would reduce firms' profits and potential investment, leading to a decrease in their supply of goods and services, which in turn would decrease aggregate demand. Combined with a decrease in consumer confidence, this effect would be amplified as consumers decrease their spending, further reducing aggregate demand.

An Increase in Business Tax Rates, Combined with a Decrease