An increase in taxes will ________ consumption spending and a decrease in transfer payments will ________ consumption spending. a. increase; decrease b. decrease; increase c. decrease; decrease d. increase; increase
Question
An increase in taxes will ________ consumption spending and a decrease in transfer payments will ________ consumption spending.
a. increase; decrease
b. decrease; increase
c. decrease; decrease
d. increase; increase
Solution
The correct answer is:
c. decrease; decrease
Here's why:
An increase in taxes reduces the disposable income of consumers, meaning they have less money to spend on goods and services. Therefore, consumption spending is likely to decrease.
Transfer payments are payments made by the government to individuals, such as social security or unemployment benefits. A decrease in these payments also reduces the disposable income of consumers, leading to a decrease in consumption spending.
So, both an increase in taxes and a decrease in transfer payments will likely lead to a decrease in consumption spending.
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