A tax cut has a smaller impact on aggregate demand than an increase in government purchases of the same size because

Question

Quizplus · Accepted Answer

When individuals receive a tax cut, they have the option to save some of the extra income rather than spending it immediately. On the other hand, when government purchases increase, the funds are directly injected into the economy through spending, which has a more immediate impact on aggregate demand.

A Tax Cut Has a Smaller Impact on Aggregate Demand