A change in net taxes affects the equilibrium quantity of GDP demanded_____.
A)in the same way as a change in government purchases does
B)in the same way as a change in planned investment does
C)in the same way as a change in net exports does
D)only indirectly,changing the level of disposable income
E)in an unpredictable manner

Question

Quizplus · Accepted Answer

A change in net taxes directly affects disposable income. When net taxes decrease, disposable income increases, leading to an increase in consumption expenditure which in turn results in an increase in equilibrium quantity of GDP demanded. Similarly, an increase in net taxes reduces disposable income leading to a decrease in consumption expenditure, leading to a decrease in equilibrium quantity of GDP demanded. The effect of changes in net taxes on GDP is only indirect, through the channel of disposable income.

A Change in Net Taxes Affects the Equilibrium Quantity of GDP