Which one of the following would cause an increase in Aggregate demand?

Question

A: an increase in the prospensity to import

B: a fall in the prospensity to save

C: an increase in the rate of the income tax

D: a reduction in gov. spendings

Answer 1

B: a fall in the propensity to save

It will increase consumption thus will increase AD

Reduction in gov spending will decrease AD

Increase in income taxes will decrease disposable income thus will lead to fall in AD.

Propensity to import will just cause redistribution of income between imported producers and domestic.

Answer 2

D