Which of the following would most likely reduce aggregate demand (shift the AD curve to the left)?

• A. A decrease in interest rates
• B. An increase in personal income taxes
• C. An increase in government spending
• D. A rise in consumer confidence

Answer: (B)

Verified step by step guidance

1. Step 1: Understand that aggregate demand (AD) represents the total demand for goods and services in an economy at a given overall price level and in a given period.
2. Step 2: Recall that factors which increase consumption, investment, government spending, or net exports will shift the AD curve to the right, while factors that decrease these components will shift the AD curve to the left.
3. Step 3: Analyze each option: a decrease in interest rates typically encourages borrowing and spending, shifting AD right; an increase in government spending directly increases AD; a rise in consumer confidence usually boosts consumption, shifting AD right.
4. Step 4: Recognize that an increase in personal income taxes reduces disposable income, leading to lower consumption and thus a decrease in aggregate demand, shifting the AD curve to the left.
5. Step 5: Conclude that among the options, an increase in personal income taxes is the factor that most likely reduces aggregate demand by decreasing consumers' spending power.