Question

why does a tax change affect aggregate demand? answers: a tax change alters disposable income and consumption spending. a tax change alters imports and net exports. a tax change alters government spending by an equal amount. a tax change alters saving by an equal amount.

Answer 1

A tax change affects aggregate demand by altering disposable income, which then changes consumption spending and investment, shifting the aggregate demand curve.

Step-by-step explanation:

A tax change affects aggregate demand primarily because it alters disposable income, which in turn impacts consumption spending. When taxes are decreased, individuals have more disposable income, which usually leads to an increase in consumption (C) and thus a shift in the aggregate demand (AD) curve. Conversely, tax increases reduce disposable income, leading to lower consumption and a decrease in aggregate demand. This relationship is an important aspect of fiscal policy, influencing the overall economy. Additionally, tax policy can stimulate or reduce investment (I) by changing tax rates for corporations or offering tax benefits for certain investments, which also shifts the AD curve.