Explain whether the following government policies affect the aggregate demand curve or the short-run aggregate supply curve and how. a) The government reduces the minimum nominal wage. b) The government increases Temporary Assistance to Needy Families (TANF) payments, government transfers to families with dependent children. c) To reduce the budget deficit, the government announces that households will pay much higher taxes beginning next year. d) The government reduces military spending.

Please refer to Explanation

Explanation:

a) The government reduces the minimum nominal wage.

SHORT-RUN Aggregate Supply Curve shifts RIGHT.

By reducing the nominal minimum wage, the government has made one of the primary inputs in production, cheaper. They have reduced the cost of labour so suppliers can afford to produce more at a lesser cost and they will take advantage by doing just that. This increase will move the SRAS to the right.

b) The government increases Temporary Assistance to Needy Families (TANF) payments, government transfers to families with dependent children.

Aggregate Demand Curve shifts RIGHT.

By increasing Transfer Payments, the government is putting more money in the hands of people. This will mean that there is more money to spend on goods and services and this is what people will do. This will have the effect of increasing Aggregate Demand. This will shift the AD curve to the right.

c) To reduce the budget deficit, the government announces that households will pay much higher taxes beginning next year.

AD Curve shifts LEFT

By imposing higher taxes, the government is reducing the amount of income people have to spend on goods and services. This still translate to a reduction in Aggregate Demand and thus the AD curve shifts left.

d) The government reduces military spending.

Aggregate Demand Curve shifts LEFT

The Aggregate Demand Curve is essentially GDP. Government Spending is a major component of GDP so if the government reduces it, then GDP will reduce as well. This will shift the Aggregate Demand Curve LEFT to signify a reduction.

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