An increase in government expenditures may lead people to expect that in the future taxes will rise and create greater distortions. By themselves these changes in expectations lead people to
A)raise both consumption and investment.
B)raise consumption but reduce investment.
C)raise investment but reduce consumption.
D)reduce both consumption and investment.

Question

Quizplus · Accepted Answer

When people expect future taxes to rise, they anticipate having less disposable income in the future. This expectation can lead to a decrease in both consumption and investment as individuals and businesses become more cautious with their spending, preferring to save more in preparation for the anticipated higher taxes.

An Increase in Government Expenditures May Lead People to Expect