Final answer:
The answer is option e). Government Spending, Increase AD.
When personal income taxes are raised by $130 million, it results in an increase in government spending, which in turn increases aggregate demand.
Step-by-step explanation:
When Congress raises personal income taxes by $130 million, it results in an increase in government spending. Government spending is a component of aggregate demand (AD).
Higher government spending causes AD to shift to the right, leading to an increase in both income and price levels.
The aggregate demand curve shifts to the right as the components of aggregate demand—consumption spending, investment spending, government spending, and spending on exports minus imports—rise. The AD curve will shift back to the left as these components fall.
Tax cuts for individuals will tend to increase consumption demand, while tax increases will tend to diminish it. Tax policy can also pump up investment demand by offering lower tax rates for corporations or tax reductions that benefit specific kinds of investment.