ECONOMICS (CBSE/UGC NET)

Detailed explanation-1: -When government spending decreases, regardless of tax policy, aggregate demand decrease, thus shifting to the left.

Detailed explanation-2: -The reduction in aggregate demand or supply will cause unemployment to increase as the change in price level lead to a change in output. The price level decreases when aggregate demand decreases and increases when aggregate supply decreases.

Detailed explanation-3: -The correct answer to the given question is option c. An increase in income taxes. An increase in income taxes leads to decrease in disposable income for consumers thereby dampening the aggregate demand for goods and services.

Detailed explanation-4: -Decreasing government spending tends to slow economic activity as the government purchases fewer goods and services from the private sector. Increasing tax revenue tends to slow economic activity by decreasing individuals’ disposable income, likely causing them to decrease spending on goods and services.