Learning Path
Question & Answer1
Understand Question2
Review Options3
Learn Explanation4
Explore TopicChoose the Best Answer
A
It shifts the curve leftward, leading to higher unemployment and lower inflation.
B
It shifts the curve rightward, resulting in lower unemployment and higher inflation.
C
It has no effect on the position of the Phillips Curve.
D
It causes a movement along the curve to a point of higher inflation and unemployment.
Understanding the Answer
Let's break down why this is correct
Answer
An increase in personal income taxes typically leads to a decrease in disposable income for individuals, meaning they have less money to spend. When people spend less, overall demand for goods and services in the economy tends to fall. This reduced demand can lead to lower inflation rates because businesses may not raise prices as much when sales are down. As a result, the short-run Phillips Curve, which shows the relationship between inflation and unemployment, may shift leftward, indicating lower inflation at any given level of unemployment. For example, if a government raises taxes, people might buy fewer new cars, causing car prices to stabilize or even drop, contributing to lower inflation overall.
Detailed Explanation
When personal income taxes go up, people have less money to spend. Other options are incorrect because This option suggests that higher taxes would lower unemployment; This choice says taxes have no effect.
Key Concepts
Phillips Curve Dynamics
Fiscal Policy Impact
Inflation and Unemployment Relationship
Topic
Phillips Curve Dynamics
Difficulty
medium level question
Cognitive Level
understand
Ready to Master More Topics?
Join thousands of students using Seekh's interactive learning platform to excel in their studies with personalized practice and detailed explanations.