When taxes decrease, consumption increases. How is this situation represented in the aggregate demand and aggregate supply model?
A) by a movement to the right along a given aggregate-demand curve
B) by shifting aggregate demand to the right
C) by shifting aggregate supply to the right
D) by a movement to the left along a given aggregate-demand curve

Question

Quizplus · Accepted Answer

A decrease in taxes leads to an increase in disposable income, which increases consumption spending. This increase in consumption spending is represented in the aggregate demand and aggregate supply model by shifting the aggregate demand curve to the right.

When Taxes Decrease, Consumption Increases