Macro Foundations · intro
What moves on the Aggregate Supply – Aggregate Demand diagram
Higher income taxes cut disposable income and consumption, shifting AD left.
Start at equilibriumequilibriumThe point where opposing forces balance, quantity supplied equals quantity demanded, so there's no pressure for price to change..
The government raises income taxes, reducing disposable income.
Consumption falls at every price level. AD shifts left.
New equilibriumequilibriumThe point where opposing forces balance, quantity supplied equals quantity demanded, so there's no pressure for price to change.: lower output and price level.
Examiners ask this as: tax increase, tax hike, higher income taxes, fiscal consolidation via taxes.
Other scenarios on Aggregate Supply – Aggregate Demand