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If the government wants to increase aggregate demand by reducing taxes, which macroeconomic idea is involved?

Answer and explanation

Correct answer: Demand management through fiscal policy

Taxes are a fiscal policy instrument. A reduction in taxes can increase households’ disposable income, encourage consumption and raise aggregate demand, although the final effect depends on how people use the additional income. Because the policy targets economy-wide demand and activity, it is a macroeconomic example of fiscal demand management.

Related tags

Fiscal-PolicyTaxAggregate-DemandGdp And WelfareNational Income And Related AggregatesEconomicsClass 11 Mcq

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