Briefly explain how a change in the personal income tax rate affects aggregate demand.

 

  1. What are supply shocks? Explain what effect adverse and favorable supply shocks have on the supply curve. Give an example of a supply shock that has affected the U.S. economy on more than one occasion.
  2. Briefly explain how a change in the personal income tax rate affects aggregate demand.
  3. True/False Statements. Indicate if the statement below is True or False. You must support your answer with a few sentences for each statement.
    1. When considering the aggregate demand curve, the wealth effect, interest rate effect and effects from international trade reinforce each other.
    2. Economic advisers who fear that the economy is growing too rapidly would recommend that the government decrease spending and/or increase taxes.
    3. An increase in government spending will shift the aggregate demand curve to the left.
    4. When federal government spending amounts to less than tax revenues, the federal government runs a budget  deficit.