What is the impact of an increase in personal income tax on the goods market, according to the circular flow model?

When personal income tax rates increase, households pay a larger portion of their income to the government. This directly reduces the amount of money households have left after taxes, which is their disposable income.

With less disposable income, households have less money available to spend on goods and services. This leads to a reduction in their consumption spending.

In the circular flow model, household consumption spending is a major component of aggregate demand in the goods market. A reduction in consumption spending means there is less demand for goods and services produced by firms. This decrease in demand can lead to a contraction in the goods market, as firms may reduce production in response to lower sales.

• A is incorrect because increased taxes on households do not directly lead to higher firm revenues; in fact, reduced household spending would likely decrease firm revenues. While government spending might increase, the direct impact on firms from the tax increase itself is not necessarily positive.
• B is incorrect because an increase in tax revenue typically allows the government to maintain or increase spending, not reduce it.
• C accurately describes the direct impact: less disposable income for households leads to reduced consumption and a contraction in the goods market.
• D is incorrect because higher taxes mean less disposable income, not more.

The most likely impact is that households will have less disposable income, leading to reduced consumption spending and a contraction in the goods market.

The final answer is $\text{C}$.