A tax increase
A)decreases aggregate demand and the AD curve shifts leftward.
B)increases aggregate demand and the AD curve shifts rightward.
C)decreases the quantity of real GDP demanded and there is a movement up along the AD curve.
D)increases the quantity of real GDP demanded and there is a movement down along the AD curve.
E)does not shift or lead to a movement along the aggregate demand curve.

Question

Quizplus · Accepted Answer

A tax increase reduces disposable income, which in turn reduces consumption spending. As consumption makes up a large part of aggregate demand, a tax increase will decrease aggregate demand and shift the AD curve leftward. Therefore, choice A is the correct answer.

A Tax Increase