If the government raises income taxes,then the equilibrium amount of employment ________ and potential GDP ________.

Question

Quizplus · Accepted Answer

When the government raises income taxes, households have less disposable income, which reduces consumer spending. This leads to a decrease in aggregate demand, which causes firms to reduce their output level and thus decrease employment. As a result, potential GDP also decreases because the economy is producing less. Therefore, the correct answer is D - decreases; decreases.

If the Government Raises Income Taxes,then the Equilibrium Amount of Employment