Basically, taxes can be used by the government to lower or increase the aggregate demand curve. The
government can use the tax policies in order to control the rate of tax that will be implemented in the
nation. If the government would give tax cuts or reduce the amount of tax that the people should pay,
then the people would have more money that they are able to spend, so therefore increasing the
consumption to go up and it would make the aggregate demand curve also increase. This means if there
is a tax cut, then the aggregate demand line shift to the right. Meanwhile if the government were to
increase the tax, then people will have less money to spend and thus reducing the amount of
consumption within the country. This will put the shift the aggregate demand line to the left, because
the consumption is reduced by the increased taxes.
For example, Mr. Budi has a monthly salary of 10 million rupiah. He has to pay his salary tax, house tax,
and car tax, for 2 million, which means he only have 8 million left to spend for his everyday needs. But in
this case, if the government were to reduce the taxes that should be paid via tax cut, and reduce the
taxes amount to only 1 million, then Mr. Budi will have an extra 1 million to spend. This extra one million
adds to the 8 million that he normally had for the everyday spending. This one million is good for Mr.
Budi and the nation’s economy as a whole. Because the extra one million will be consumed and spent in
the economy, thus increasing consumption level of the country thus also increasing the aggregate
demand line.