Question

7. Which of the following both shift aggregate demand left? a. a decrease in taxes and at a given price level consumers feel more wealthy b. a decrease in taxes and at a given price level consumers feel less wealthy c. an increase in taxes and at a given price level consumers feel more wealthy d. an increase in taxes and at a given price level consumers feel less wealthy

Answer 1

Answer:

In this case,the answer would be option d. or an increase in taxes and at a given price level consumers feel less wealthy.

Explanation:

• Aggregate Consumption Expenditure is an important component or determinant of the aggregate demand(AD) which positively or directly affects the AD,meaning that a general increase in the aggregate consumption expenditure will increase the AD in the economy and vise versa.
• Now,an increase in income tax is evidently a bad news for the consumers or buyers in the economy as the disposable household income would decrease as a result and the consumers or buyers would have less money or income at their disposable to spend on various goods and services in the economy.
• Therefore,an increase in tax in this case would lead a fall in the disposable income of the consumers/buyers which will further lead to a decrease in the overall consumption expenditure in the economy.
• Hence,everything else held constant,as aggregate consumption expenditure decreases in the economy,the AD will also decrease consequently and the AD curve shift downward or leftward in the graphical illustration of the goods market.