In the short run, a decrease in personal income taxes will result in _________________.

Question

BlackTom AI · Accepted Answer

To tackle this question, let's first restate what happens in the short run when personal income taxes fall.
Option 1: 'Movement along the aggregate supply curve' — A tax cut primarily affects spending by households, boosting overall demand. It does not imply a change along the existing SRAS; rather, it shifts the overall demand in the economy. So this option is not consistent with the typical short-run effect.
Option 2: 'Movement along the aggregate demand curve' — A movement along AD would occur if the price level changed while AD remained constant. A tax reduction changes spending behavior and overall spending at each price level, which shifts the AD curve itself rather than moving along it. Therefore this option mischaracterizes the effect.
Option 3: 'The aggregate demand curve shifting right' — This is the standard result: lower taxes increase disposable income, raising consumption and investment (through higher demand), which shifts the entire AD curve to the right in the short run.
Option 4: 'The aggregate demand curve shifting left' — A tax cut would not reduce aggregate demand; shifting left would require a contractionary impulse, opposite to the effect of tax relief. This option is inconsistent with the expected outcome.
In summary, the only choice that aligns with a tax reduction increasing overall demand and moving the AD curve outward is the rightward shift of the aggregate demand curve, while the other options describe outcomes that do not match the standard short-run macroeconomic impact of tax cuts.

ECON 2002.01 AU2025 (21333) Final Exam- Requires Respondus LockDown Browser

In the short run, a decrease in personal income taxes will result in _________________.

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