A government decides to increase personal income taxes to reduce the budget deficit. In the short run, what is the likely effect on the Phillips Curve, and how might this impact inflation and unemployment rates?

When a government increases personal income taxes, people have less money to spend, which can slow down the economy. This situation is likely to shift the Phillips Curve, which shows the relationship between inflation and unemployment. In the short run, higher taxes can lead to higher unemployment because businesses may hire fewer workers due to decreased consumer spending. At the same time, inflation might decrease since there is less demand for goods and services. For example, if people have to pay more taxes, they might cut back on eating out, leading restaurants to lower prices and potentially lay off staff, which illustrates how both inflation and unemployment can be affected.