If taxes are increased, the AD curve
A) is not affected because a change in taxes is a nominal change not real change.
B) does not shift but there is a movement down along the curve.
C) shifts rightward and aggregate demand decreases.
D) shifts leftward and aggregate demand decreases.

Question

Quizplus · Accepted Answer

When taxes are increased, households and firms have less disposable income which leads to a decrease in consumption and investment spending. This causes the AD curve to shift leftward, resulting in a decrease in aggregate demand.

If Taxes Are Increased, the AD Curve