Consumer spending is linked to disposable income. In 2011 and 2012, President Obama lowered the payroll...

Consumer spending is linked to disposable income. In 2011 and 2012, President Obama lowered the payroll taxes paid by workers from 6.2% to 4.2%. Explain how this change in taxes affected consumption and aggregate demand.

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Expert Solution

A disposable income is a Total income - taxes.

A reduction in the taxes will increase the disposable income of the people in the economy and with an increased disposable income people will demand more of good. Consumption in the economy will rise and aggregate demand will improve.

The higher the taxes are lower the disposable income will be and lesser the people will demand and if the taxes are lowered the demand will increase with increased disposable income.

Rahul Sunny answered 1 year ago

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