Which of the following describes the effects of a decrease in net taxes?
A) A decrease in net taxes raises aggregate expenditure by raising disposable income, thereby increasing consumption.
B) A decrease in net taxes raises aggregate expenditure by raising disposable income, thereby decreasing consumption.
C) A decrease in net taxes lowers aggregate expenditure by lowering disposable income, thereby decreasing consumption.
D) It lowers aggregate expenditure by lowering disposable income, thereby increasing consumption.

Question

Which of the following describes the effects of a decrease in net taxes?  
A) A decrease in net taxes raises aggregate expenditure by raising disposable income, thereby increasing consumption. 
B) A decrease in net taxes raises aggregate expenditure by raising disposable income, thereby decreasing consumption. 
C) A decrease in net taxes lowers aggregate expenditure by lowering disposable income, thereby decreasing consumption. 
D) It lowers aggregate expenditure by lowering disposable income, thereby increasing consumption.

Quizplus · Accepted Answer

When there is a decrease in net taxes, disposable income increases since individuals and firms have more money available to spend or invest. This increase in disposable income leads to an increase in consumption which, in turn, raises aggregate expenditure. Therefore, option A describes the effects of a decrease in net taxes accurately.

Which of the Following Describes the Effects of a Decrease