An increase in income taxes will reduce the rate of increase in aggregate demand but will have no effect on aggregate supply.

Question

Quizplus · Accepted Answer

An increase in income taxes reduces consumers' disposable income, leading to a decrease in consumer spending, which directly affects aggregate demand. However, it can also affect aggregate supply in the long term if it influences incentives for work, savings, and investment, potentially reducing the capacity or willingness to produce goods and services.

An Increase in Income Taxes Will Reduce the Rate of Increase