How do changes in income tax policies affect aggregate demand?
A)Higher taxes increase disposable income, consumption, and aggregate demand.
B)Higher taxes reduce disposable income, consumption, and aggregate demand.
C)Higher taxes increase corporate investment and aggregate demand.
D)Higher taxes increase aggregate supply and thus increase aggregate demand as well.
E)Higher taxes increase government revenue, which makes consumers more confident in the future, which increases aggregate demand.

Question

Quizplus · Accepted Answer

When income tax policies are changed to increase taxes, consumers have less disposable income to spend on goods and services, leading to a reduction in consumption and thus a decrease in aggregate demand. This happens because higher taxes decrease the amount of money that individuals can spend on goods, which in turn results in lower consumer spending.

How Do Changes in Income Tax Policies Affect Aggregate Demand