Question

If in response to this situation, the government decides to increase taxes enough to stabilize debt, this will most likely result in ________.

Can someone explain to me why these are the answers please?

1. 3.6%

2. 9.05%

3. a decrease in output

Answer 1

When the government decides to increase taxes enough to stabilize debt, this will most likely result in a decrease in output.

This is because increase in tax will lead to a decrease in the demand as disposable income goes down which will lead to decrease in output.