What effects would an increase of excise taxes on cigarettes have on aggregate demand or aggregate supply?

Question

What effects would each of the following have on aggregate demand or aggregate supply?

In each case state where the aggregate demand effected and in which direction or the aggregate supply is effected and in which direction. Assume all other things remain constant.

a. A widespread fear of depression on the part of consumers.

b. A large purchase of US wheat by Russia.

c. A $1 increase in the excise tax on cigarettes.

d. A reduction in interest rates at each price level.

Answer 1

a. A widespread fear of depression on the part of consumers.

As consumers fear a depression, they will save more out of precaution. Hence, aggregate demand will decrease.

b. A large purchase of US wheat by Russia.

The increase in demand will incrase prices for wheat in the U.S., which will make wheat production more attractive to U.S. farmers. Hence, aggregate supply will increase.

c. A $1 increase in the excise tax on cigarettes.

It has been shown that higher prices for cigarettes discourage smoking. Every 10 percent increase in the price of cigarettes reduced youth smoking by about seven percent and overall cigarette consumption by about four percent. Hence, aggregate demand for cigarettes will decrease. http://tobaccofreekids.org/research/fact...

d. A reduction in interest rates at each price level.

As interest rates decrease, consumers will  borrow more. Hence, aggregate demand for loans will increase.