When drawn against the real interest rate,the output demand curve unambiguously shifts to the right if either or both of the following occur.
A) an increase in current taxes and an increase in future taxes
B) an increase in current taxes and a decrease in future taxes
C) a decrease in current taxes and an increase in future taxes
D) a decrease in current taxes and a decrease in future taxes
E) an increase in current taxes and a reduction in interest rates.

Question

Quizplus · Accepted Answer

When current taxes decrease, households have more disposable income, leading to an increase in consumption spending, which contributes to an increase in output demand. In addition, when future taxes decrease, households will have more disposable income in the future, which will increase their saving rates, leading to an increase in investment spending and a higher level of output demand. Therefore, a decrease in current taxes and a decrease in future taxes lead to an unambiguous shift of the output demand curve to the right when drawn against the real interest rate.

When Drawn Against the Real Interest Rate,the Output Demand Curve