Which of the following statements regarding taxes is correct ?
Correct answer: D. A permanent change in taxes has a greater effect on aggregate demand than a temporary change in taxes.
- A. Most economists believe that in the short run the greatest impact of a change in taxes is on aggregate supply, not aggregate demand
- B. An increase in taxes shifts the aggregate demand curve to the right
- C. A decrease in taxes shifts the aggregate supply curve to the left
- D. A permanent change in taxes has a greater effect on aggregate demand than a temporary change in taxes.
Explanation
A permanent tax change usually affects consumption more than a temporary change because households adjust their spending based on expected long-term disposable income. Thus, a permanent tax change has the larger aggregate-demand effect.
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