An increase in taxes
A)reduces income by more than the total fall in consumption.
B)reduces income by the same amount as the total fall in consumption.
C)reduces income and consumption by the same amount as taxes fall.
D)reduces income by the amount of the initial fall in consumption.

Question

Quizplus · Accepted Answer

If taxes increase, people have less disposable income to spend on consumption. This reduces consumption, which in turn reduces aggregate demand and causes a decrease in national income. Therefore, the reduction in income will be equal to the total fall in consumption.

An Increase in Taxes