Increase in income taxes shifts aggregate demand leftward

Steps:

• Raising income taxes reduces households' disposable income.
• Lower disposable income decreases consumption expenditure.
• Aggregate demand curve shifts left from initial equilibrium at X.
• New equilibrium occurs at lower output and price level, corresponding to point D.

Why D is correct:

• D shows the post-shift AD-AS intersection, aligning with the Keynesian consumption function where higher taxes reduce C = c(Y - T).

Why the others are wrong:

• A: Indicates rightward AD shift, which would occur with tax cuts, not increases.
• B: Represents no change in equilibrium, ignoring the tax impact on demand.
• C: Suggests higher output but same prices, inconsistent with leftward AD shift reducing both.

Final answer: D