Question

While in office, President Obama discussed raising income taxes for individuals earning over $250,000 in income. Explain how these higher income taxes would affect the aggregate demand curve.

Answer 1

It will reduce, or push inwards, the aggregate demand curve.

Step-by-step explanation:

While in office, the president considered a government revenue incremental policy of raising taxes (for a specific fraction of the population - those who earn above $250,000 income).

What is the ripple effect of these higher taxes on the country's aggregate demand curve?

- When tax rate is raised for high income earners, they have less disposable income (where disposable income = income left for the earner after tax has been deducted).

- With a lesser amount of disposable income, their purchasing power is reduced. Their demand/consumption falls.

- When viewed in the macro economy, the drop in the demand for goods and services by this fraction of the population, will pull down the aggregate demand (total demand) curve. The curve will shift inward or leftward; showing a fall in aggregate demand which is not due to increase in prices.