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.
Frequently asked questions
What is the correct answer to this question?
Demand management through fiscal policy
Why is this the correct answer?
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.
Which subject and chapter does this question cover?
This is a Class 11 Economics question. Chapter: National Income and Related Aggregates. Topic: GDP and Welfare.
