If the government cuts taxes, total spending will fall and AD will shift to the left, ceteris paribus.

Question

Quizplus · Accepted Answer

If the government cuts taxes, households and firms would have more disposable income, which will increase consumption and investment spending. This increase in spending can offset the reduction in government expenditure caused by the tax cut. Therefore, the net effect on AD is uncertain and depends on the specific circumstances of the economy.

If the Government Cuts Taxes, Total Spending Will Fall and AD