Aggregate expenditure

QUESTION

Explain how the aggregate expenditure function shifts in response to changes when consumer confidence decreases and when higher taxes are imposed on business profits
The aggregate expenditure function slopes downward and to the right because it is inversely related to the price level. When consumer confidence decreases the whole function shifts to the left as people demand and consume less at each price level. People become more concerned about the future and saving for a rainy day, and thus are less willing to open their pocketbooks. When higher taxes

re imposed on business profits, business have less money to spend on expansion, modernizing facilities, and other requirements for the future. So their expenditures on investments go down. This also causes the aggregate expenditure function to shift to the left.

ANSWER:

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