Suppose the federal government increases personal income tax rates to balance the budget.Automatic stabilizers will _____ the _____ effect of the _____ in aggregate demand.

Question

Quizplus · Accepted Answer

When the government increases personal income tax rates, it will decrease disposable income for consumers, which will lead to a decrease in consumption spending. This will act as a contractionary force on aggregate demand. Automatic stabilizers, such as unemployment benefits and progressive tax systems, will work to offset some of the negative impact on consumers, but they will not completely eliminate the contractionary effect. Therefore, the answer is B: decrease; contractionary; decrease.

Suppose the Federal Government Increases Personal Income Tax Rates to Balance