Suppose that the United States is at full employment. Then the federal governmen

Question

Suppose that the United States is at full employment. Then the federal government increases taxes, and all other influences on aggregate demand remain the same. Explain the effect of the tax cut on aggregate demand in the short run.

When the federal government increases taxes, _______

A. aggregate demand increases

B. the quantity of real GDP demanded decreases but aggregate demand does not change

C. the quantity of real GDP demanded increases but aggregate demand does not change

D. aggregate demand decreases

Explanation / Answer

A. aggregate demand increases

Reson

It means that the government is pursuing expansionary policy. Thus, the aggregate demand will shift to the right as a result.

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