The goverment decides to reduce the spending along with a comparable reduction in taxes,
What is the effect on Aggregate demand?
I thought was a shift to the left due to the fiscal multiplier (the effect on a similar increase in G and T, the net impact in the fiscal policy will be positive).
But the correct answer is the impact is indeterminate without further information… Why??
Correct me if I’m wrong. I think Aggregate demand will shift to the left. Not aggregate supply.
I selected that one but the correct one was indeterminate… I do not understand why if we consider the fiscal multiplier.
Effect on aggregate supply should be indeterminable. I think aggregate demand shifts left. The aggregate supply should not change.
Reduction in Gov spending will reduce AD by magnitude of Amt* Fiscal Multiplier and Reduction in Taxes will increase AD by Amt*Fiscal Multiplier* MPC. Unless the actual amount of spending and tax reduction is not mentioned it is hard to say which way demand curve shall shift.
If both the amts are equivalent then it shall shift left given MPC is not equal to 1.
Yes maybe the key is that we do not the MPC and that´s why is indeterminate.
Good point sir!