A tax reduction of a specific amount will be more expansionary, the:
A)smaller is the economy's MPC.
B)larger is the economy's MPC.
C)smaller is the economy's multiplier.
D)less the economy's built-in stability.

Question

Quizplus · Accepted Answer

A larger MPC indicates that households will spend a larger fraction of the tax reduction, leading to a larger increase in aggregate demand and a more expansionary effect. The multiplier effect will also be larger with a larger MPC. The built-in stability of the economy is not directly related to the size of the tax reduction.

A Tax Reduction of a Specific Amount Will Be More