Answer to Question #110704 in Macroeconomics for Fezeka

Question

If government decides to increase personal tax to raise it's tax revenue,what will be impact on the economy?

Answer 1

Primarily through their impact on demand. Tax cuts boost demand by increasing disposable income and by encouraging businesses to hire and invest more. Tax increases do the reverse. These demand effects can be substantial when the economy is weak but smaller when it is operating near capacity.