If the federal government raises taxes:
A)aggregate expenditure will fall, leading to a decrease in equilibrium GDP.
B)consumption and investment will increase, leading to a rise in aggregate expenditure and an increase in equilibrium GDP.
C)aggregate expenditure will rise, leading to an increase in equilibrium GDP.
D)the government will experience a budget surplus, which will raise aggregate expenditure.

Question

Quizplus · Accepted Answer

When the federal government raises taxes, households and firms have less disposable income to spend and invest, leading to a decrease in consumption and investment. This ultimately results in a fall in aggregate expenditure and a decrease in equilibrium GDP.

If the Federal Government Raises Taxes