Question : Statement 1: An increase in taxes will lead to a movement along the aggregate demand curve.
Statement 2: An increase in business investment will lead to a movement along the aggregate supply curve.
Which statement is correct?
Option 1: Only Statement 1
Option 2: Only Statement 2
Option 3: Both Statement 1 and Statement 2
Option 4: Neither Statement 1 nor Statement 2
Correct Answer: Neither Statement 1 nor Statement 2
Solution : The correct answer is (D) Neither Statement 1 nor Statement 2
This statement is incorrect. An increase in taxes typically reduces consumers' disposable income, which leads to a decrease in consumer spending and a decrease in aggregate demand. However, this does not result in a movement along the aggregate demand curve but rather a leftward shift of the aggregate demand curve.
This statement is also incorrect. An increase in business investment typically expands the productive capacity of the economy, leading to an increase in aggregate supply. However, this does not cause a movement along the aggregate supply curve but rather a rightward shift of the curve.
Therefore, neither Statement 1 nor Statement 2 is correct.
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