Suppose the government increases lump-sum taxes. This causes, A) disposable inco

Question

Suppose the government increases lump-sum taxes. This causes, A) disposable income to decrese which causes consumption spending to decrease and aggregate demand to decrease, B) government spending to decrease, which causes aggregate demand to decrease, C) consumption spending to decrease and spending on imports to increase. The effect on aggregate demand depends on whether domestic spending or spending on imports decreased the most, or D) disposable income to decrease, which causes aggregate supply to decrease?

Explanation / Answer

b. government spending to decrease, which causes aggregate demand to decrease

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