Raising taxes as an element of discretionary fiscal policy is intended to reduce aggregate demand.Under what circumstances could such a policy also reduce aggregate supply?
A) if the higher taxes cause workers to seek out a second job
B) if the higher taxes cause workers to work less
C) if the government purchases goods with the additional revenue
D) if the government uses the additional revenue to retire some of the federal debt

Question

Raising taxes as an element of discretionary fiscal policy is intended to reduce aggregate demand.Under what circumstances could such a policy also reduce aggregate supply?  
A) if the higher taxes cause workers to seek out a second job 
B) if the higher taxes cause workers to work less 
C) if the government purchases goods with the additional revenue 
D) if the government uses the additional revenue to retire some of the federal debt

Quizplus · Accepted Answer

When higher taxes cause workers to work less, the aggregate supply may decrease since there will be fewer goods and services produced. This can happen if the taxes reduce workers' incentives to work or if they reduce the disposable income available for spending and saving.

Raising Taxes as an Element of Discretionary Fiscal Policy Is