Question

18. If the government increases taxes on households, how would it impact the Circular Flow Model?

a. It would lead to higher household savings.
b. It would decrease household consumption.
c. It would have no impact on the model.
d. It would reduce the amount of money in the economy.

Answer 1

Increasing taxes on households would lead to a decrease in household consumption and a decrease in overall economic activity.

Step-by-step explanation:

Increasing taxes on households would have an impact on the Circular Flow Model. Specifically, it would decrease household consumption because households would have less disposable income available to spend on goods and services. When taxes are increased, households have less money to spend and they are likely to reduce their consumption, which can lead to a decrease in overall economic activity.

Learn more about Effect of increasing taxes on households in the Circular Flow Model