Question

In a certain economy, people save some part of their income in the financial sector and use the remaining part for consumption. The government decides to increase the tax rates for everyone in that economy. What effect will the tax increase have on savings and investment in the economy?

Answer 1

To answer the question above as to what effect will the tax increase have on savings and investment in the economy when the government decides to increase the tax rate for everyone in that sector is that people will be hesitant to save and invest, they'll be sure to weigh in as to which would be the proper move if the tax increase will cripple their investments or savings. Tax increase harms economic growth in a sense that it will affect peoples savings and investment which plays a key role in the economy.

Answer 2

Savings decrease, and investment decreases.

Step-by-step explanation:

A government normally increases taxes to boost it's tax revenue but this also results in the decrease of savings and investments. Higher taxes leaves consumers with less disposable income which then discourages them from saving and investing.