Question

Higher personal income taxes Part 2 A. increase aggregate demand. B. increase disposable income. C. decrease aggregate demand. D. both B and C.

Answer 1

An increase in income taxes reduces disposable personal income and thus reduces consumption (but by less than the change in disposable personal income).

That shifts the aggregate demand curve leftward by an amount equal to the initial change in consumption that the change in income taxes produces times the multiplier.

How do higher taxes affect aggregate demand?

In the model of aggregate demand and aggregate supply, a tax rate increase will shift the aggregate demand curve to the left by an amount equal to the initial change in aggregate expenditures induced by the tax rate boost times the new value of the multiplier.

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