The government increases taxes. As a result, in the short run, real GDP_____________ and the price level_____________ .
A) decreases; falls
B) decreases; rises
C) increases; rises
D) increases; falls

Question

Quizplus · Accepted Answer

In the short run, an increase in taxes reduces disposable income, leading to a decrease in aggregate demand. This decrease in aggregate demand shifts the aggregate demand curve to the left, resulting in a decrease in real GDP and a fall in the price level.

The Government Increases Taxes