What are some possible effects of raising taxes What about r

What are some possible effects of raising taxes? What about raising govt. spending?

Solution

The possible effect of the rise in the taxes is the decline in the aggregate demand in the economy. The rising of the taxes will reduce the disposable income of the people so they have less disposable income they consume and save less. So when there is a decline in the consumption it would reduce the demand for goods and services and there by reduce the aggregate demand in the economy. The savings is in the economy is equal to the investment so the people save less it will reduce the investment.

When the government spends more in the economy and it adds more money to the pockets. So this increases their disposable income and this inturn increases the savings and consumption and the aggregate demand in the economy will rise and the economy will witness economic growth. The country will see a rise in the price level.