Suppose higher taxes on businesses cause a decrease in spending on plant and equipment.How will this affect the aggregate expenditure (AE) and the aggregate demand (AD) schedules?
A)AE shifts up; AD shifts to the left
B)AE shifts down; AD shifts to the left
C)AE shifts up; AD shifts to the right
D)AE shifts down; AD shifts to the right

Question

Quizplus · Accepted Answer

Higher taxes on businesses will decrease their spending on plant and equipment, which will then result in a decrease in their investment. Investment is a component of aggregate expenditure (AE), so AE will shift down. As a result of the decrease in investment, aggregate demand (AD) will shift to the left.

Suppose Higher Taxes on Businesses Cause a Decrease in Spending