Answer to Question #219462 in Microeconomics for darily

Question

“The government decided to raise the taxes on people's income in an economy of full employment.”

Identify how the aggregate demand curve might be changed/shifted by the monetary or fiscal policies mentioned above. Illustrate(draw a graph) and explain the impact described above.

Answer 1

If government decided to raise the taxes on people's income. This is likely to result in reduction of disposable person income of these people. Making them reduce their consumption (demand for products).

This leads to shifts in the aggregate demand curve leftward by an amount equal to the initial change in consumption that the change in income taxes produced times the multiplier.