Which of the following explains the effects of an increase in net taxes?
A) An increase in net taxes raises aggregate expenditure by raising disposable income, thereby increasing consumption.
B) An increase in net taxes raises aggregate expenditure by raising disposable income, thereby decreasing consumption.
C) An increase in net taxes lowers aggregate expenditure by lowering disposable income, thereby increasing consumption.
D) An increase in net taxes lowers aggregate expenditure by lowering disposable income, thereby decreasing consumption.

Question

Which of the following explains the effects of an increase in net taxes?  
A) An increase in net taxes raises aggregate expenditure by raising disposable income, thereby increasing consumption. 
B) An increase in net taxes raises aggregate expenditure by raising disposable income, thereby decreasing consumption. 
C) An increase in net taxes lowers aggregate expenditure by lowering disposable income, thereby increasing consumption. 
D) An increase in net taxes lowers aggregate expenditure by lowering disposable income, thereby decreasing consumption.

Quizplus · Accepted Answer

An increase in net taxes would result in a decrease in disposable income, which would subsequently lower aggregate expenditure. Therefore, consumption would decrease.

Which of the Following Explains the Effects of an Increase