Suppose a tax cut affects aggregate demand and aggregate supply.Which of the shifts raise real GDP?
A)both the shift of aggregate demand and the shift of aggregate supply
B)the shift of aggregate demand,but not the shift of aggregate supply
C)the shift of aggregate supply,but not the shift of aggregate demand
D)neither the shift of aggregate demand nor the shift of aggregate supply

Question

Quizplus · Accepted Answer

Both the shift of aggregate demand and the shift of aggregate supply can raise real GDP. An increase in aggregate demand causes an increase in both output and prices. However, an increase in aggregate supply increases output and decreases prices. When both shifts happen together, output will increase while the effect on prices will be ambiguous. Thus, option A is the best answer.

Suppose a Tax Cut Affects Aggregate Demand and Aggregate Supply