Income Tax Increase Reduces Aggregate Demand

Steps:

• Higher income tax lowers households' disposable income.
• Reduced disposable income decreases consumer spending on goods and services.
• Consumption is the largest component of aggregate demand (AD = C + I + G + NX).
• Lower consumption shifts the aggregate demand curve leftward in the short run.

Why A is correct:

• Aggregate demand includes consumption, which falls when taxes rise, per the AD formula, reducing total spending at every price level.

Why the others are wrong:

• B: Tax increase reduces spending, so AD shifts left, not right.
• C: Short-run aggregate supply depends on production costs, not income taxes on households.
• D: No mechanism for income tax to increase production or shift AS right.

Final answer: A