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True or False:  A fall in the tax rate on capital will cause the aggregate expenditure...

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lilylee | Student, College Freshman | (Level 1) Salutatorian

Posted June 24, 2013 at 10:20 PM via web

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True or False:  A fall in the tax rate on capital will cause the aggregate expenditure curve to shift up and the aggregrate demand curve to shift to the left, all else constant.

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pohnpei397 | College Teacher | (Level 3) Distinguished Educator

Posted June 24, 2013 at 10:53 PM (Answer #1)

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This question really contains two statements.  If the statements are both included in the question, they both have to be true in order for the statement to be true.  In this case, the second statement is clearly not true.  Therefore, the statement as a whole is false.

The aggregate expenditures curve will go up if the tax rate on capital goes down.  If the tax rate goes down, firms will buy more capital.  Firms’ spending on capital is one part of aggregate expenditures.  Therefore, lower taxes lead to more spending, thus leading to an increase in aggregate expenditures.

However, the aggregate demand curve will not shift to the left.  If an aggregate demand curve shifts to the left, that means that aggregate demand has declined.  But aggregate demand will actually rise if the tax rate declines.  Once again, this is because lower taxes lead to more spending on capital.  More spending means increased aggregate demand, which is shown by a shift of the curve to the right, not to the left.

This statement as a whole is false because only one of the two statements that make it up is true.

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