Macro Foundations · intro
What moves on the Aggregate Supply – Aggregate Demand diagram
Lower income taxes raise disposable income; consumption rises by the MPCMPCMarginal propensity to consume: the fraction of an extra dollar of income that gets spent rather than saved. times the change, shifting AD right.
Start at equilibriumequilibriumThe point where opposing forces balance, quantity supplied equals quantity demanded, so there's no pressure for price to change..
The government cuts income taxes, raising households' disposable income.
Consumption rises at every price level. AD shifts right (scaled by the MPCMPCMarginal propensity to consume: the fraction of an extra dollar of income that gets spent rather than saved.).
New equilibriumequilibriumThe point where opposing forces balance, quantity supplied equals quantity demanded, so there's no pressure for price to change.: higher output and price level.
Examiners ask this as: tax cut, income tax reduction, lower personal taxes, tax relief, disposable income rises.
Other scenarios on Aggregate Supply – Aggregate Demand