When taxes are cut, aggregate demand ________ and aggregate supply ________.
A) increases; increases
B) increases; decreases
C) decreases; increases
D) decreases; decreases
E) increases; does not change

Question

Quizplus · Accepted Answer

When taxes are cut, people and businesses have more disposable income which increases consumption and investment spending, thereby increasing aggregate demand. Lower taxes also encourage businesses to expand and hire more workers, which increases production and shifts aggregate supply to the right. Therefore, both aggregate demand and aggregate supply increase when taxes are cut.

When Taxes Are Cut, Aggregate Demand ________ and Aggregate Supply