A decrease in net taxes:
A)increases GDP as much as an equal decrease in government purchases.
B)increases GDP less than an equal increase in government purchases.
C)decreases GDP more than an equal decrease in government purchases.
D)changes GDP in an unpredictable manner.
E)has no effect on GDP.

Question

Quizplus · Accepted Answer

According to the government expenditure multiplier, a decrease in net taxes will stimulate aggregate demand and lead to an increase in GDP. However, the increase in GDP will be less than an equal increase in government purchases because the multiplier for net taxes is smaller than the multiplier for government purchases. Therefore, choice B is the correct answer.

A Decrease in Net Taxes