Other things being equal, an increase in taxes will

Question

Quizplus · Accepted Answer

An increase in taxes will reduce the disposable income of consumers, leading to a decrease in consumption spending. This reduction in spending will ultimately cause a decrease in investment and net exports as well, all contributing to a decrease in aggregate demand. The increase in taxes is also likely to lead to a decrease in business profits and investment, which will reduce the long run aggregate supply curve. The increase in taxes will not influence the short run aggregate supply curve, as this is primarily determined by the costs of production. The increase in taxes is also not likely to lead to a corresponding reduction in interest rates, as these are mainly influenced by monetary policy rather than fiscal policy.

Other Things Being Equal, an Increase in Taxes Will