Suppose the government increases taxes. One effect of this change is that it decreases
A) the size of the government expenditure multiplier.
B) disposable income, which decreases consumption expenditure and aggregate demand.
C) government expenditure, which decreases aggregate demand.
D) disposable income which then decreases aggregate supply.

Question

Quizplus · Accepted Answer

Increasing taxes reduces disposable income, which means people have less money to spend on consumption. This decrease in consumption expenditure leads to a decrease in aggregate demand.

Suppose the Government Increases Taxes