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?
A.
Savings decrease, and investment decreases.
B.
Savings increase, and investment increases.
C.
Savings increase, and investment decreases.
D.
Savings decrease, and investment increases.
A government normally increases taxes to boost it's tax revenue but this also results in the decrease of savings and investments. Higher taxes leaves consumers with less disposable income which then discourages them from saving and investing.
