Macro Doubt ! Help plz !

[Anjali]

Last year a ₤400 million tax increase was accompanied by a ₤600 million decrease in consumer spending. One reason why spending decreased by more than taxes were increased is that:

  a) the tax increase raised interest rates which in turn depressed consumer borrowing. c) reduced spending by those with lower take-home pay led to decreased income and spending by others.   b) the tax increase induced fewer transfer payments which in turn deterred consumer spending.  d) higher taxes required higher government spending which in turn discouraged private spending.

[phelps.phan]

hi Anjali, I think the answer is c since tax reduces the disposable income which leads to less consumption.

[Anjali]

Even I think its C . But not sure .

[akanksha]

a tax in itself is at transfer payment.so shouldnt increase in tax payment increase the transfer payment..?

[Homer Simpson]

It will be (c)

Here, there is no mention of transfer payments by government - besides tax payment increases mean less disposable income for people - increase in transfer payments entails the opposite.

[Ashima]

Yup c :)