Everything else held constant, aggregate demand increases when:

Question

BlackTom AI · Accepted Answer

Aggregate demand rises when one or more of its spending components (consumption, investment, government purchases, net exports) increase, holding other factors constant.

1) Relevant concepts
- Aggregate demand (AD) = C + I + G + (X − M).  
- A tax cut raises households’ disposable income, which raises consumption via the marginal propensity to consume (MPC).  
- The spending multiplier = 1/(1 − MPC), so an initial rise in consumption produces a larger total increase in AD.  
- By contrast, lower “animal spirits” (business confidence), a reduced money supply, or lower government spending reduce components of AD.

2) Step-by-step reasoning
- A tax cut (fiscal expansion) increases disposable income (Yd).  
- Households spend a fraction MPC of that extra income, so consumption increases by MPC × (tax cut).  
- That initial rise in consumption induces further rounds of spending given the multiplier, shifting the AD curve to the right (AD increases).

3) Numerical illustration (intermediate steps)
- Assume MPC = 0.8 and a $100 tax cut.  
- Initial consumption increase = MPC × tax cut = 0.8 × $100 = $80.  
- Spending multiplier = 1/(1 − MPC) = 1/(1 − 0.8) = 5.  
- Total increase in AD = multiplier × initial consumption increase = 5 × $80 = $400.

4) Why the correct answer is correct
- Cutting taxes directly increases consumption and aggregate demand through the MPC and multiplier mechanism. Under ceteris paribus, this is a standard expansionary fiscal policy that shifts AD right.

5) Why the other options are incorrect
- a. If animal spirits decrease, business investment falls, so AD decreases, not increases.  
- b. Reducing the money supply is contractionary monetary policy: interest rates rise, investment and consumption fall → AD falls.  
- d. Reducing government spending lowers G directly, reducing AD.

6) Conclusion
- Therefore, everything else held constant, aggregate demand increases when taxes are cut; the correct choice is c.

Everything else held constant, aggregate demand increases when:Single choice

Similar Questions

What would lower aggregate demand (AD)?

Why is aggregate demand (AD) downward-sloping?

What would shift aggregate demand (AD) to the right?

What would lower aggregate demand (AD)?

Why is aggregate demand (AD) downward-sloping?

What would shift aggregate demand (AD) to the right?

The aggregate demand curve is downward sloping because a higher inflation rate leads the central bank to raise interest rates, thereby equilibrium output.

Everything else held constant, an increase in financial frictions aggregate .

More Practical Tools for Students Powered by AI Study Helper

Homework AI Solver

Stylized AI Paper Writer

Plagiarism Checker Assistant

Citation AI Academic Writing Tool

In-Class Translation Assistant

AI Note Generator

AI Quiz Answers

Past Exam Questions from University Test Bank

Smart Practice Assistant

Adaptive Practice

Making Your Study Simpler

Everything else held constant, aggregate demand increases when:Single choice

Similar Questions

What would lower aggregate demand (AD)?

Why is aggregate demand (AD) downward-sloping?

What would shift aggregate demand (AD) to the right?

What would lower aggregate demand (AD)?

Why is aggregate demand (AD) downward-sloping?

What would shift aggregate demand (AD) to the right?

The aggregate demand curve is downward sloping because a higher inflation rate leads the central bank to raise ________ interest rates, thereby ________ equilibrium output.

Everything else held constant, an increase in financial frictions ________ aggregate ________.

More Practical Tools for Students Powered by AI Study Helper

Making Your Study Simpler

The aggregate demand curve is downward sloping because a higher inflation rate leads the central bank to raise interest rates, thereby equilibrium output.

Everything else held constant, an increase in financial frictions aggregate .