If the government increases taxes,which of the following will occur in the short run?
A) An increase in GDP,an increase in the price level,an increase in money demand and an increase in the interest rate.
B) An increase in GDP,an increase in the price level,a decrease in money demand and an increase in the interest rate.
C) An increase in GDP,a decrease in the price level,an increase in money demand and an increase in the interest rate.
D) A decrease in GDP,a decrease in the price level,a decrease in money demand and a decrease in the interest rate.
E) A decrease in GDP,an increase in the price level,an increase in money demand and a decrease in the interest rate.

Question

Quizplus · Accepted Answer

When the government increases taxes, households and firms have less disposable income and therefore demand for goods and services decreases. This leads to a decrease in GDP. Additionally, an increase in taxes leads to a decrease in consumption and investment spending, which further lowers GDP. The decrease in demand also leads to a decrease in the price level. A decrease in demand for money (due to lower consumer and investment spending) leads to a decrease in money demand and a reduced interest rate.

If the Government Increases Taxes,which of the Following Will Occur