Which of the following pairs of policies have inconsistent effects on aggregate demand?
A)A tax increase and an increase in the money supply.
B)A transfer payment increase and an increase in the money supply.
C)A reduction in government purchases and a reduction of the money supply.
D)none of the above

Question

Which of the following pairs of policies have inconsistent effects on aggregate demand?
A)​A tax increase and an increase in the money supply.
B)​A transfer payment increase and an increase in the money supply.
C)​A reduction in government purchases and a reduction of the money supply.
D)​none of the above

Quizplus · Accepted Answer

A tax increase reduces disposable income and consumption, which decreases aggregate demand. However, an increase in the money supply increases consumption and investment, thereby increasing aggregate demand. Therefore, these policies have inconsistent effects on aggregate demand. 
Option B has consistent effects as an increase in transfer payments and an increase in the money supply both increase disposable income and consumption, thereby increasing aggregate demand. Similarly, Option C has consistent effects as a reduction in government purchases and reduction in money supply both decrease consumption and investment, thereby decreasing aggregate demand.

Which of the Following Pairs of Policies Have Inconsistent Effects