When Taxes Increase, Consumption

question 305

Multiple Choice

When taxes increase, consumption

• A) increases, so aggregate demand shifts right.
• B) increases, so aggregate supply shifts right.
• C) decreases, so aggregate demand shifts left.
• D) decreases, so aggregate supply shifts left.

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Definitions:

Interest Tax Shield

A deduction allowed for the interest paid on debt, thereby reducing taxable income and the total tax owed.

M&M Proposition I

outlines that in a perfect market, without taxes and transaction costs, a company's value is unaffected by its capital structure.

Direct Bankruptcy Costs

The expenses incurred by a company when going through the process of declaring bankruptcy, including legal fees, accounting fees, trustee fees, and other associated administrative expenses.

Pre-Packaged Bankruptcy

A plan for financial reorganization that a company prepares in cooperation with its creditors before filing for bankruptcy.