If tax rates increased, giving people a decreased incentive to work and businesses a decreased incentive to invest
A) aggregate supply will decrease, aggregate output will decrease, and the price level will decrease.
B) aggregate supply will decrease, aggregate output will decrease, and the price level will increase.
C) both aggregate supply and demand will decrease, aggregate output will decrease, and the price level will decrease.
D) aggregate supply will decrease, aggregate demand will increase, aggregate output will decrease, and the price level will increase.

Question

Quizplus · Accepted Answer

If tax rates increase, it reduces the disposable income of individuals and reduces the after-tax return on investment, thus decreasing the incentives to work and invest. This will lead to a decrease in aggregate supply as there will be a decrease in the production of goods and services due to the reduced incentives. With an decrease in aggregate supply, aggregate output will also decrease. Moreover, the decreased demand for goods and services will lead to a decrease in the price level. Therefore, choice B is the correct answer.

If Tax Rates Increased, Giving People a Decreased Incentive to Work