When the economy is at full employment, a cut in household taxes will increase consumption
By increasing disposable income and motivating companies to expand their hiring and investment, tax cuts increase demand. Tax hikes work the opposite way. These demand effects can be significant while the economy is struggling but are less pronounced when it is close to capacity.
Changes in transfer payments, like those in income taxes, modify households' personal disposable income and thus have an impact on their consumption, which is a factor in aggregate demand. The aggregate demand curve will therefore alter as a result of a change in transfer payments because it will impact consumption.
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