when the government raises taxes where is the economy at tha

when the government raises taxes, where is the economy at that pojnt?

Solution

By raisng or cutting taxes, the government affects households\' level of disposable income (after-tax income). A rise in tax will reduce disposable income, because it takes money out of households. A cut in taxes will increase disposable income, because it leaves more money with households. Disposable income is the main dereminant that drives consumer demand, which accounts for two-thirds of total demand

In times when economy experiences inflation, when high demand is bidding up prices, a raise in tax, coupled with no raise in government spending, will dampen the upward pressure on prices. The raise in tax lowers demand by reducing disposable income. As long as that decrease in consumer demand is not offset by a raise in government demand, total demand declines. Thus to dampen inflationary pressure and economic growth, the government can raise taxes and keep spending constant