The "fiscal cliff" is a term which describes the merge of two events on December 31, 2012. One of those events is the expiration of the Bush tax cuts which was passed in 2001, and the other is a scheduled reduction in government spending (Budget Control Act of 2011). The effect of the Fiscal cliff is massive. The effect of the tax increases and reduced government spending will decrease GDP by 4 full percentage points, and increase the unemployment rate by a whole one percent which is a loss of about two million jobs, driving the country towards a recession. As an effect of the fiscal cliff, it brings up the idea of price sensitivity. Consumers will want to spend less money, so they will ask themselves "Is it necessary?." This will lead them to look for substitutes. For example, when looking for a mouthwash which is such a wide market, people will substitute their usual brand for the cheapest product. People will not invest as much. As a result of the decrease in consumer demand, the producers will manufacture a lot less and the quantity will decrease. One solution to the Fiscal cliff is to cancel some or all of the increased tax and spending cuts but a huge consequence to that is that the our debt will continue to grow at a much higher rate.
Be careful. When you make a statement like "massive" or "4 full percentage points" you are using biased information off of the internet. Be careful to use your own words based on what you know about the effect of increasing taxes and not pull things from the internet. You are correct that less income that resulted from higher taxation will result in lower demand which will lead to lower quantity supplied. Why will our debt increase?
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