Explain how a change in tax rates influences aggregate demand and aggregate supply

What will be an ideal response?

A change in tax rates will influence consumer spending and business investment spending, both of which are components of aggregate demand. For example, if tax rates decrease, consumers and businesses will have more income to spend, and the spending increases will increase aggregate demand. If tax rates decrease, labor supply and output will tend to increase because businesses will pay less in taxes and therefore have more to spend on labor and capital, and these changes will increase aggregate supply.