An increase in taxes lowers income:
A) and the interest rate in the short run, but leaves both unchanged in the long run.
B) in the short run, but leaves it unchanged in the long run, while increasing consumption and lowering investment.
C) in the short run, but leaves it unchanged in the long run, while lowering consumption and increasing investment.
D) and the interest rate in both the short and long runs.

Question

Quizplus · Accepted Answer

In the short run, higher taxes reduce disposable income, leading to lower consumption. In the long run, the economy adjusts, and income returns to its potential level, but with lower consumption, investment may increase due to lower interest rates.

An Increase in Taxes Lowers Income