Question

For each of the scenarios, please decide whether there will be an increase, decrease, or no change in aggregate demand. The United States government decides to increase the federal tax rate by 4% for all earners. The newest release of the Consumer Confidence Index shows a steady increase in consumer confidence about the economy. aggregate demand decreases aggregate demand increases A manufacturing boom during the late 1990s has created an oversupply of tractors, a necessary implement in agricultural production The Federal Reserve, the agency charged with regulating banking and monetary policy in the United States, decides to increase the amount of money available in the economy aggregate demand decreases aggregate demand increases no change Vaggregate demand decreases aggregate demand increases

Answer 1

If the United States government decides to increase the federal tax rate, it will reduce the disposable income of the people and therefore, they will have less money with them to spend. Therefore, the aggregate demand will decrease. If there is oversupply of tractors, there will not be enough demand to meet the supply and thus, some tractors will remain idle in the warehouse. Due to this, the manufacturer of tractors must have invested more amount in the tractors but are not able to extract the money by selling it all. Therefore, they will have less money with them and so, the aggregate demand will decrease. If the consumer's confidence increases about the economy, they will be optimistic about their income and the economy and will spend more money, increasing the aggregate demand. Finally, if the Federal Reserve increases the money available in the economy, people will have more money to spend, and so, aggregate demand will increase.