An increase in personal income tax rates will cause a(n)

An increase in personal income taxes will cause a(n)

Multiple Choice

decrease (or shift left) in aggregate demand.

increase (or shift right) in aggregate demand.

decrease in the quantity of real output demanded (or movement up along AD).

increase in the quantity of real output demanded (or movement down along AD).

Is it b) or a)?

Answer

Answer : The correct option is a .

Because if personal income tax increase then the budget on consumptions decrease which decrease the aggregate demand and as a result the aggregate demand curve shifts to leftward.

For example, let a person's income is $1000 and pays the income tax 10% on his income. Here the taxable amount on $1000 income is (10% × 1000) = $100. So, the total budget on consumption is (1000 - 100) = $900. Now, if the personal income tax raises and becomes 20% on $1000 income then the taxable amount becomes (20% × 1000) =$200 and hence the total budget becomes (1000 - 200) = $800.

Therefore, it is clear that if personal income tax increase then the budget on consumption decrease which decrease the aggregate demand. As a result the aggregate demand curve shifts to leftward.

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