Which of the following is most likely to increase aggregate demand in an economy with low economic growth? (a) Which policy is correct: an increase in incom...
Question 1 Report
Which of the following is most likely to increase aggregate demand in an economy with low economic growth?
(a) Which policy is correct: an increase in income tax, a decrease in government infrastructure spending, an increase in interest rates, or a decrease in income tax? [1]
(b) Explain how the selected policy could affect consumer spending. [1]
Answer Details
(a) A decrease in income tax is most likely to increase aggregate demand. [1]
Aggregate demand includes consumer spending. Lower income tax leaves households with more of their earnings after tax.
(b) Households have higher disposable income, so they may increase consumption spending. [1]
An increase in income tax, higher interest rates, or lower infrastructure spending would be more likely to reduce spending and aggregate demand.
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