Economics Question

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Nithu05
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Hi, do indirect taxes affect the level of investment, and thus by extension aggregate demand. I know that indirect taxes increase the costs of production but does this affect the level of investment?
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safahJ
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If firms have to bear the cost of the tax then this may reduce investment. More tax= less profits= less money for investment.

Indirect taxes actually affect supply not AD.

Indirect tax - increases cost of production thereby supply or SRAS
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Nithu05
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(Original post by safahJ)
If firms have to bear the cost of the tax then this may reduce investment. More tax= less profits= less money for investment.

Indirect taxes actually affect supply not AD.

Indirect tax - increases cost of production thereby supply or SRAS
Thank you but isn't investment a component of AD? My thinking was that an increase in indirect taxes will increase the costs of production thus reducing future prospective profits and therefore causing a reduction in business confidence. As a result, this will lead to a fall in the marginal propensity to invest and therefore a reduction in investment levels causing AD to decrease? So indirect taxes will definitely affect the SRAS curve but potentially the AD curve? Therefore, while drawing a diagram, I should only shift the SRAS curve? Thanks so much for your help
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safahJ
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(Original post by Nithu05)
Thank you but isn't investment a component of AD? My thinking was that an increase in indirect taxes will increase the costs of production thus reducing future prospective profits and therefore causing a reduction in business confidence. As a result, this will lead to a fall in the marginal propensity to invest and therefore a reduction in investment levels causing AD to decrease? So indirect taxes will definitely affect the SRAS curve but potentially the AD curve? Therefore, while drawing a diagram, I should only shift the SRAS curve? Thanks so much for your help
yes this could be a long run impact, not necessarily in the short run.
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