Explain the change in aggregate demand when
1)Taxes are increased by $100 Billion
2. (7 pts) Both 1 and 2 occur simultaneously (please try to do it ASAP)
that was what the instructor prividedHomework Answers
Answer : 1) The formula of aggregate demand is,
Aggregate demand = Consumption + Investment + Government expenditure + Net export (Export - Import).
Now remaining other things as constant if only government expenditure increase by $100 billion then the aggregate demand will increase by $100 billion.
2) Remaining other things as constant if only tax rate increase then the aggregate demand decrease. So, here if only taxes increase by $100 billion then the aggregate demand will decrease by $100 billion.
3) Now if simultaneously the government spending and taxes increase by $100 billion then the aggregate demand remain unchanged. Because increase in government spending by $100 billion increase the GDP by $100 billion and increase in taxes by $100 billion decrease the GDP by $100 billion.
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