An increase in income taxes ________ employment and ________ potential GDP.Group of answer choicesincreases; does not changedecreases; does not change.increases; decreases.increases; increases.
Question
An increase in income taxes ________ employment and ________ potential GDP.Group of answer choicesincreases; does not changedecreases; does not change.increases; decreases.increases; increases.
Solution
An increase in income taxes decreases employment and decreases potential GDP.
Here's why:
Step 1: When income taxes increase, people have less disposable income to spend.
Step 2: This decrease in consumer spending can lead to a decrease in demand for goods and services.
Step 3: When demand decreases, businesses may need to cut back on production, which can lead to layoffs and a decrease in employment.
Step 4: With fewer people employed and producing goods and services, the potential GDP (the maximum possible output of an economy) also decreases.
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