Other things equal, an increase in taxes on businesses will
A) increase aggregate supply, decrease aggregate demand, and cause the price level to fall.
B) increase aggregate supply, increase aggregate demand, and cause real GDP to rise.
C) decrease aggregate supply, decrease aggregate demand, and cause real GDP to fall.
D) decrease aggregate supply, increase aggregate demand, and cause the price level to rise.

Question

Quizplus · Accepted Answer

An increase in taxes on businesses will increase the cost of production, which will lead to a decrease in aggregate supply. As a result, businesses will produce less output, causing a decrease in aggregate demand and real GDP. The price level may also decrease or remain unchanged, as the decrease in demand may offset the increase in production costs.

Other Things Equal, an Increase in Taxes on Businesses Will