If tax rates are raised to avoid a deficit during a recession,then
A)real GDP and deadweight loss from taxes will rise.
B)real GDP will rise and deadweight loss from taxes will fall.
C)real GDP will fall and deadweight loss from taxes will rise.
D)real GDP and deadweight loss from taxes will fall.

Question

Quizplus · Accepted Answer

Raising tax rates during a recession will decrease consumer spending and investment, leading to a decrease in aggregate demand and thus a decrease in real GDP. Furthermore, deadweight loss from taxes will also rise as people try to avoid the higher tax rates by reducing their taxable income or engaging in tax evasion.

If Tax Rates Are Raised to Avoid a Deficit During