An increase in taxes lowers income:
A)and the interest rate in the short run but leaves both unchanged in the long run.
B)in the short run but leaves it unchanged in the long run, while increasing consumption and lowering investment.
C)in the short run but leaves it unchanged in the long run, while lowering consumption and increasing investment.
D)and the interest rate in both the short run and in the long run.

Question

Quizplus · Accepted Answer

In the short run, higher taxes reduce disposable income, leading to lower consumption. In the long run, the economy adjusts, and income returns to its natural level, but with lower consumption, investment can increase due to higher savings.

An Increase in Taxes Lowers Income