Question

Which of the following policies shifts the AD curve the farthest rightward?A. A decrease in government purchases of $10 billion.B. A decrease in taxes of $10 billion.C. An increase in government purchases of $10 billion.D. an increase in taxes of $10 billion.

Answer 1

Answer:

The correct option here is B) decrease in taxes of $10 billion.

Explanation:

The aggregate demand consists of four components which are consumption spending, government spending, investment spending and net exports( export - import ) and when these components rise the aggregate demand curve will shift towards the right side.

Cutting taxes will increase the both investment and consumption spending , as when the taxes are lower, people would spend more on the consumption and corporations also would want to invest more when the tax rates are low, and since we know when the components of aggregate demand rise the demand curve would shift towards farthest right because here two components are rising because of tax cuts.