Raising taxes to finance increases in government spending will be an effective means of increasing aggregate demand only if:

Question

Quizplus · Accepted Answer

Raising taxes will only increase aggregate demand if the private sector is saving a high percentage of its income. If the private sector is already spending a high percentage of its income, then raising taxes will likely decrease their spending and reduce aggregate demand. Additionally, if the public sector is larger than the private sector, raising taxes may not be an effective means of increasing aggregate demand. Finally, if crowding out is present, government spending may displace private spending, making tax increases ineffective in increasing aggregate demand.

Raising Taxes to Finance Increases in Government Spending Will Be