True or False: The Obama administration in 2013 let a tax holiday expire which effectively increases income taxes for all workers who pay into social security. The effect of this increase in taxes, all else constant, would shift the consumption function down, the aggregate expenditure curve down, and the short-run aggregate supply curve to the left.
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This statement is true. It has three parts to it, and all of them are correct.
In this scenario, the Obama administration allows the tax break to expire. Because of that, taxes effectively go up. This causes a decrease in aggregate supply. The reason for this is that people who are having more of their money taken out of their paychecks are supposed to be less willing to work. They will be less willing to work because work is not as lucrative. When taxes go up, both the aggregate expenditures curve and the consumption function will shift downward. This will be the case because the increase in taxes will reduce the amount of money that people have. When the amount of money that people have goes down, they have less money to spend and these lines therefore shift downward.
For these reasons, this statement is true.
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