Answer to Question #130721 in Macroeconomics for OBVIOUS

Question

If the Minister of Finance wanted to withdraw funds from the economy using the flows of income, spending and production, you would advise him to …

[1] increase government spending to firms.

[2] decrease government spending to firms.

[3] increase spending on public goods and services.

[4] increase taxes received from households.

Answer 1

D. Increase taxes received from households.

Through increased taxes on households, income tax rate increases via taxes such as, Pay As You Earn (PAYE). A high income tax reduces household's disposal income, thus withdrawing money from the through income flows. A subsequent reduction of disposable income has a ripple effect on spending, as income reduces, spending reduces as well. A decrease on household expenditure due to lower disposable income withdraws funds from economy via spending flows. Lastly, low spending by households reduces the demand on consumption goods and services. Firms then react by cutting down on the production rate, thus matching supply with the lower demand in the market. In this sense, funds are withdrawn from the economy through the flows of production since money that would go to pay for factors of productions like labor are reduced as the firms have been forced to lower scales of production.