Question

An income tax rate increase will most likely ____ aggregate demand and _____ aggregate supply.

A) increase; increase
B) increase; decrease
C) decrease; decrease
D) decrease; increase

Answer 1

An income tax rate increase will most like decrease aggregate demand and decrease aggregate supply.

Step-by-step explanation:

• First,an increase in income tax would be a bad news for the consumers and the households as the disposable income will decrease because of the tax increase,everything else held constant.
• A reduction in the disposable income of consumers will understandably lead to a decrease in the overall consumer or buyer demand for goods and services in the economy thereby causing a decline in the aggregate consumption expenditure on goods and services in the economy,depending on the magnitude of marginal propensity to consume in the economy.Now,aggregate consumption expenditure is one of the major components of aggregate demand and due to a fall in the aggregate consumption expenditure,the aggregate demand will decrease in the economy.
• Secondly,a rise in income tax and a fall in tax deducted or disposable income can perhaps demotivate many existing workers and employees to work as efficiently or actively as before.This tax cut policy can also potentially discourage many new workers or laborers to join or participate in the labor or work force in the economy.This would consequently lead to a decline in the aggregate supply as well as the total or overall production of goods and services will fall due to lesser supply of labor and labor productivity in general.
• Hence,an income tax increase will cause decrease in both aggregate demand and aggregate supply in the economy.

Answer 2

Answer: Option C decrease; decrease

Step-by-step explanation:

When the income tax rate increases the people would have to spend more on paying taxes which reduces their income eventually. When the income is reduced the demand will also decrease and this in turn would decrease the supply of the goods.

The aggregate demand and supply curve will also shift to the left. The economic growth of the country will also slow down when the aggregate demand and aggregate supply decrease. This is due to the decreased consumer spending in the country.