Question

Which of the following will shift the aggregate demand curve to the left?

1. The government reduces personal income taxes.

2. Interest rates rise.

3. The government raises corporate profit taxes.

4. There is an economic boom overseas that raises the incomes of foreign households.

Short answer

Option (b) and (c) will result in a leftward shift in the aggregate demand curve.

Step-by-step solution

Explanation for the correct options

An increase in interest rate will decrease the investment because the funds borrowed for the investment will accrue high costs. The declined investment will reduce the aggregate demand, and the demand curve will shift to the left.

An increase in corporate profit taxes will reduce the expected rate of return after taxes. The fall in the predicted rate of return will lower the investment and the aggregate demand. Therefore, the aggregate demand curve shifts to the left.

Explanations for the incorrect options

A fall in personal income taxes will increase the disposable income of households. With the increase in disposable income, private consumption will rise. Therefore the aggregate demand will increase, and the demand curve will shift to the right.

An economic boom overseas will increase the U.S. net exports as foreigners increase their imports during the expansion. An increase in net exports will increase the aggregate demand curve for the U.S. The aggregate demand curve will shift to the right.