The effect of a change in taxes is less than the same sized change in government expenditure because
A)some people do not pay their taxes.
B)tax rates are the same regardless of income levels.
C)the amount by which consumption initially changes is equal to MPS times the tax change.
D)the amount by which consumption initially changes is equal to MPC times the tax change.
E)changes in government expenditure do not directly affect consumption.

Question

Quizplus · Accepted Answer

The amount by which consumption initially changes is equal to MPC (marginal propensity to consume) times the tax change. This means that for every dollar of tax change, only a fraction of that will be initially spent by consumers. On the other hand, a dollar increase in government expenditure will have a greater initial impact on consumption because it is spent immediately by the government. Therefore, the effect of a change in taxes is less than the same sized change in government expenditure. Choices A and B are irrelevant to the question, while choice E is incorrect as changes in government expenditure do affect consumption.

The Effect of a Change in Taxes Is Less Than