What Happens to Aggregate Demand When Government Spending and the Taxes

question 106

Multiple Choice

What happens to aggregate demand when government spending and the taxes to pay for it both rise by the same amount?

• A)Aggregate demand falls by the amount of the government spending.
• B)There is no effect.
• C)Aggregate demand rises by the amount of the government spending.
• D)Aggregate demand rises by the amount of the government spending times the multiplier.

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Definitions:

Discount Rate

This interest rate is used in the framework of discounted cash flow analysis to determine the present worth of cash flows anticipated in times ahead.

Simple Rate of Return

A financial metric that measures the efficiency of an investment as the annual income divided by the initial investment cost.

Time Value of Money

The principle that a sum of money is worth more now than the same sum in the future due to its potential earning capacity.