Holding all else constant,a decrease in consumption taxes,such as sales taxes or a VAT,will ________ aggregate expenditure and ________ employment.
A) increase; increase
B) increase; decrease
C) decrease; increase
D) decrease; decrease

Question

Quizplus · Accepted Answer

A decrease in consumption taxes will increase households' disposable income, leading to an increase in consumption spending. This increase in consumer spending will lead to an increase in aggregate expenditure which stimulates an increase in demand for goods and services. As a result, firms may have to hire more workers, thus leading to an increase in employment.

Holding All Else Constant,a Decrease in Consumption Taxes,such as Sales