If taxes are raised, but the Fed prevents income from falling by raising the money supply, then:
A) both consumption and investment remain unchanged.
B) consumption rises but investment falls.
C) investment rises but consumption falls.
D) both consumption and investment fall.

Question

Quizplus · Accepted Answer

When the Fed raises the money supply to counteract the effects of higher taxes, it typically leads to lower interest rates. Lower interest rates make borrowing cheaper, which can encourage investment. However, higher taxes can reduce disposable income, leading to a potential decrease in consumption.

If Taxes Are Raised, but the Fed Prevents Income from Falling