Explain how an increase in the level of taxation can affect the level of aggregate demand
Aggregate demand is the sum of consumption, investment, government spending and net exports.Consumption can change for various reasons such as changes in income, taxes, expectations about future income, and changes in wealth levels.An increase in the level of taxation will reduce disposable income, this will cause consumption and investments to fall, shifting the aggregate demand curve left. Therefore, this reduces the price level and decreases the GDP size.
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