Suppose the government increases taxes.One effect of this change is that it decreases
A) disposable income, which decreases consumption expenditure and aggregate demand.
B) government expenditure, which decreases aggregate demand.
C) the size of the government expenditure multiplier.
D) disposable income which then decreases aggregate supply.

Question

Quizplus · Accepted Answer

When the government increases taxes, it reduces disposable income for households and businesses. This reduction in disposable income leads to a decrease in consumption expenditure, which is a component of aggregate demand. Therefore, choice A is the correct answer. Choice B is incorrect because an increase in taxes does not necessarily lead to a decrease in government expenditure. Choice C is also incorrect because the change in the size of the government expenditure multiplier is not a direct effect of an increase in taxes. Choice D is incorrect because a decrease in disposable income due to higher taxes does not directly affect aggregate supply.

Suppose the Government Increases Taxes