An increase in taxes I. violates the Taylor rule.
II) decreases real GDP.
III) forces the Fed to change its instruments.
A) I only
B) II only
C) I and III
D) I and II

Question

Quizplus · Accepted Answer

Increasing taxes reduces consumer and investor spending, which leads to a decrease in aggregate demand and a decrease in real GDP. The Taylor rule is a guideline for setting interest rates based on inflation and output levels, and increasing taxes does not necessarily violate it. The Fed may or may not need to change its instruments, depending on the situation.

An Increase in Taxes I