📚 Learning Guide
Phillips Curve Dynamics
hard

If the relationship between inflation and unemployment is like a seesaw, where one side goes up as the other goes down, then the impact of increased personal income taxes on the economy can be compared to what effect on the seesaw? A: Decreasing consumption leading to higher unemployment :: B: Increasing investment leading to lower inflation :: C: Maintaining constant demand leading to stable inflation :: D: Increasing government spending leading to lower unemployment

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Choose the Best Answer

A

Decreasing consumption leading to higher unemployment

B

Increasing investment leading to lower inflation

C

Maintaining constant demand leading to stable inflation

D

Increasing government spending leading to lower unemployment

Understanding the Answer

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Answer

The relationship between inflation and unemployment, often illustrated by a seesaw, suggests that when one side rises, the other tends to fall. In the context of increased personal income taxes, people have less money to spend, which usually leads to decreased consumption. This drop in spending can hurt businesses, causing them to reduce their workforce, which results in higher unemployment. Therefore, the correct comparison is that increased taxes decrease consumption, leading to higher unemployment, much like one side of the seesaw going down as the other goes up. This aligns with option A: decreasing consumption leading to higher unemployment.

Detailed Explanation

When personal income taxes go up, people have less money to spend. Other options are incorrect because This answer suggests that higher taxes would encourage businesses to invest more; This option implies that taxes won't change how much people buy.

Key Concepts

Phillips Curve Dynamics
Fiscal Policy Impact
Macroeconomic Equilibrium
Topic

Phillips Curve Dynamics

Difficulty

hard level question

Cognitive Level

understand

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