Question

response must range from 300-400 words

Which do you think will decrease consumption more: a 10 percent decrease in after-tax income or a 10 percent decrease in stock market values? Explain

Answer 1

-->A 10 percent decrease in after tax income(means there is an increased tax) will decrease consumption more than a 10% decrease in stock market values due to the following:-

-->a)Increase in taxes decreases household demand by reducing workers’ take-home pay. It can also reduce business demand by decreasing firms’ after-tax cash flow, which makes hiring and investing more difficult.

-->b)The increase and decrease in stock prices can influence numerous factors in the economy such as consumer and business confidence which can, in turn, have a positive or negative impact on the economy as a whole. In the case of a fall in stock prices, there is a negative wealth effect. It creates an environment of uncertainty among consumers and a fall in the value of their investment portfolios decreases spending on goods and services. This affects economic growth as consumer spending is a major component of Gross Domestic Product.

-->both a) and b) will be having negative effect in the economy in the form of negative consumer spending.however,it is more reflected in a) because as it directly affects consumer behaviour.