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

Question

Quizplus · Accepted Answer

Increasing taxes reduces disposable income, which in turn decreases consumption expenditure. Since consumption is a component of aggregate demand, a decrease in consumption expenditure leads to a decrease in aggregate demand.

Suppose That the Government Increases Taxes