Choose the correct statement.
A)Tax cuts increase aggregate supply and aggregate demand.
B)Tax cuts strengthen the incentive to work and to invest.
C)The tax multiplier becomes smaller as time passes.
D)According to Barro and Uhlig, tax cuts are a less powerful way to stimulate real GDP than spending increases.
E)Both A and B are correct.

Question

Quizplus · Accepted Answer

Tax cuts can increase aggregate supply by lowering the cost of production and increasing the incentives for firms to produce more. They can also increase aggregate demand by leaving more money in the hands of consumers, who will increase their spending. Tax cuts can also strengthen the incentive to work and invest, as individuals and firms keep more of their income and profits. Therefore, both A and B are correct. The tax multiplier may become smaller over time if the initial increase in demand is offset by higher interest rates, inflation, or other factors. Barro and Uhlig's research suggests that spending increases may have a larger effect on real GDP than tax cuts in some cases, but this is not a universally accepted conclusion.

Choose the Correct Statement