The government increases the sales tax on all goods but does not change the tax on income earned from labor.What happens?

Question

Quizplus · Accepted Answer

With an increase in sales tax, the cost of production for firms will increase which will lead to a decrease in the demand for output. As a result, firms will produce less which means that they will demand fewer workers. This will reduce the demand for labor, causing a decrease in employment and wages. Therefore, the correct option is B.

The Government Increases the Sales Tax on All Goods but Does