A tax cut has the same long-run effect on the economy as the long-run effect of an increase in government purchases.

Question

Quizplus · Accepted Answer

A tax cut and an increase in government purchases have different long-run effects on the economy. A tax cut leads to an increase in disposable income, which stimulates consumption and investment, while an increase in government purchases leads to an increase in aggregate demand and potentially inflation. Additionally, a tax cut may lead to a decrease in government revenue and could contribute to a larger budget deficit or debt, whereas an increase in government purchases may be funded by increased government revenue.

A Tax Cut Has the Same Long-Run Effect on the Economy