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    Aggregate Demand and Supply Curves

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    I am trying to understand shifts in the aggregate supply and demand curves.

    What happens to aggregate demand and aggregate supply when a tax is raised or imposed? Which direction to they shift and why?

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    Solution Preview

    Hello - I'm happy to answer this question for you.

    Let's consider the Aggregate Demand (AD) function first. The first thing to consider is what a tax does to the variables in the aggregate demand curve, which are Consumption (C), Investment (I) and Government (G). A tax on consumer goods is going to decrease consumption, because it ...

    Solution Summary

    This 229 word solution explains how taxes affect aggregate demand and aggregate supply curves.