An increase in personal income taxes will cause a(n):

• A. decrease in government revenue
• B. decrease in consumers' disposable income
• C. increase in aggregate demand
• D. increase in consumers' purchasing power

Answer: (B)

Verified step by step guidance

1. Understand the concept of disposable income, which is the income consumers have left after paying personal income taxes. It is calculated as: \(\text{Disposable Income} = \text{Personal Income} - \text{Personal Income Taxes}\).
2. Recognize that an increase in personal income taxes reduces disposable income because consumers have to pay more taxes, leaving them with less money to spend.
3. Recall that a decrease in disposable income typically leads to a decrease in consumers' purchasing power, as they have less money available to buy goods and services.
4. Analyze the impact on aggregate demand, which depends on consumers' spending. Since consumers have less disposable income, their consumption tends to decrease, which can reduce aggregate demand rather than increase it.
5. Conclude that an increase in personal income taxes does not decrease government revenue (it usually increases it), nor does it increase consumers' purchasing power or aggregate demand; instead, it decreases consumers' disposable income.