Question

Ceteris paribus, which of the following will cause the aggregate-demand curve to shift to the right (increase)?

		A decrease in consumer and business confidence because of a terrorist attack.
		An increase in the interest rate.
		A decrease in consumer and business taxes.
		All of the above.

Answer 1

The correct answer is 'Option C'.

A decrease in consumer and business taxes will increase the disposable income of consumers. People will have more money to spend in their hands due to a fall in tax rates. This will increase the demand in the economy as a result of which the aggregate demand curve will shift to the right. On the other hand, a decrease in consumer confidence will decrease the consumption expenditure as a result of which the aggregate demand curve will shift to the left. An increase in tax rates will discourage the investors to borrow money and this will reduce investments. So, the aggregate demand curve will shift to the left. Therefore, the correct answer is 'Option C'.