The AD curve shifts to the left with a __________ in government purchases (G)or a __________ in taxes.
A) rise; rise
B) rise; fall
C) fall; rise
D) fall; fall

Question

Quizplus · Accepted Answer

An increase in taxes (a fall in disposable income) or a decrease in government purchases will decrease aggregate demand, causing the AD curve to shift left. Option A is incorrect because a rise in both G and taxes would have an ambiguous effect on AD, depending on the relative magnitudes of the shifts. Option B is incorrect because a rise in G and a fall in taxes would increase AD, shifting the curve right. Option D is incorrect because a fall in both G and taxes would also have an ambiguous effect on AD.

The AD Curve Shifts to the Left with a __________