Question

Household in Maggietopia save 40% of every additional dollar in income that they receive. What will happen to aggregate demand Maggietopia if there is a $2 billion increase in lump-sum taxes?

Answer 1

Aggregate demand in Maggietopia will shift to the left if there is an increment of the lump-sum taxes to about $2 Billion.

A lump-sum tax refers to taxes where everyone has to pay a fixed amount. Regardless of how it designed, taxes serve to reduce disposable income. When disposable income reduces, there are adjustments to demands.

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