If net taxes increase and government purchases decrease,
A)the price level will rise
B)the money supply must increase
C)the aggregate demand will shift rightward
D)output and employment will fall
E)there will be a federal budget deficit

Question

Quizplus · Accepted Answer

If net taxes increase and government purchases decrease, it will lead to a decrease in aggregate demand. This is because an increase in net taxes will lower disposable income which will lead to lower consumption, and a decrease in government purchases will lead to higher unemployment and lower investment. As a result, output and employment will fall. The price level may remain unchanged or fall due to decreased demand. The money supply is unrelated to this scenario. There may or may not be a federal budget deficit depending on the magnitude of the changes in taxes and government purchases.

If Net Taxes Increase and Government Purchases Decrease