Impact of Taxation on Aggregate Demand

How does government taxation to reduce aggregate demand and the level of GDP? Extra taxes’ lower our disposable incomes, and lower disposable incomes tend to reduce our consumption spending. (]early if investment and government purchases remain the same, a reduction in consumption spending will then reduce GDP and employment. Thus, in the multiplier model, higher taxes without increases in government purchases will tend to reduce real GDP.

Without a doubt, taxes lower output in our multiplier model, and Figure 24-7 shows why.When rise, 1+ G does not change, but the increase in will lower disposable income, thereby shifting the consumption schedule downward. Hence C + 1+ G schedule shifts downward, You can in a new, lower C+ 1+ G schedule in Figure 24- Confirm its new intersection with the 45° must be at a ‘lower equilibrium level of GDP.

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