Which of the following would cause aggregate demand to decrease?
A) The government increases taxes on both business and personal income.
B) A drop in the foreign exchange value of the dollar
C) The Fed increases the amount of money in circulation.
D) Businesses and households believe that the economy is headed for good times, so they begin to feel increased security about their jobs.

Question

Quizplus · Accepted Answer

When the government increases taxes on both business and personal income, it decreases the disposable income of consumers and decreases the profits of businesses. As a result, consumers will spend less, and businesses will reduce their output, causing a decrease in aggregate demand.

Answer: B
 A drop in the foreign exchange value of the dollar means that the dollar has become weaker in terms of other currencies. As a result, foreign goods and services become more expensive, causing a decrease in exports. Since exports contribute to aggregate demand, a drop in exports results in a decrease in aggregate demand.

Answer: D
 If businesses and households believe that the economy is headed for good times, they will feel more secure about their jobs and finances. Consequently, they will likely increase their spending, contributing to an increase in aggregate demand.

Which of the Following Would Cause Aggregate Demand to Decrease