Question

What does an increase in taxes and decrease in the money supply do to the supply and demand curves?

Answer 1

Answer:

The supply and demand curves will shift to the left i.e. there will be a decrease in demand and supply.

Step-by-step explanation:

First: Tax is a compulsory contribution to state revenue, levied by the government on workers' income and business profits, or added to the cost of some goods, services, and transactions.

Secondly: Money supply is the total amount of monetary assets available in an economy at a specific time.

When tax is increased, this means individuals and businesses have to contribute more to the state revenue leaving both categories with lesser income or profit i.e. lesser to spend.

In the same way, when money supply decreases, there is lesser money available to both individuals and businesses

What this implies is that demand will decrease because income has decreased. Supply will also decrease because producers will not make as much profit given the increase in tax (tax is considered cost of production).

As a result of this, the demand curve shifts to the left, the supply curve also shift to the left because both demand and supply will decrease.