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In a certain economy, people save some part of their income in the financial sector and use the remaining part for consumption. The government decides to increase the tax rates for everyone in that economy. What effect will the tax increase have on savings and investment in the economy?

ASavings decrease, and investment decreases.
BSavings increase, and investment increases.
CSavings increase, and investment decreases.
DSavings decrease, and investment increases.

Verified Answer :

Savings increase and investment decreases

Answer:

Option A, Savings decreases and investment decreases, is the right answer.

Explanation:


The imposition of tax will decrease the disposable income because disposable income is the one that remains after paying the direct tax and this disposable income is further saved or consumed. However, tax and disposable income are inversely related. Therefore, if disposable income decreases then saving also decreases. Moreover, investment depends on saving. Thus, if the tax rate leads to a decrease in savings then the investment will also decrease

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