The Keynesian perspective on the effect of an increase in taxes is that this policy action
A) generates reductions in consumption and in saving.
B) generates reductions in consumption and an increase in saving to pay for the new taxes.
C) has no impact on consumption.
D) increases current consumption and reduces future consumption.

Question

Quizplus · Accepted Answer

According to the Keynesian perspective, an increase in taxes results in a decrease in disposable income, leading to a reduction in consumption. The reduction in consumption, in turn, leads to a decrease in savings as individuals have less income to save. Therefore, the correct choice is A, which states that an increase in taxes generates reductions in consumption and savings.

The Keynesian Perspective on the Effect of an Increase in Taxes