When the crowding-out effect of a decrease in taxes is included in the analysis:
A)AD shifts left.
B)AD doesn't change.
C)AD shifts right.
D)any change in AD is indeterminate.

Question

Quizplus · Accepted Answer

A decrease in taxes typically increases disposable income, leading to higher consumption and shifting the aggregate demand (AD) curve to the right. However, the crowding-out effect refers to the possibility that increased government borrowing to finance a deficit could lead to higher interest rates, which might dampen investment. Despite this, the initial effect of a tax decrease is an increase in AD.

When the Crowding-Out Effect of a Decrease in Taxes Is