A $1 increase in government spending on goods and services will have a greater impact on the equilibrium GDP than will a $1 decline in taxes because
A) government spending is more employment intensive than is either consumption or investment spending.
B) government spending increases the money supply and a tax reduction does not.
C) a portion of a tax cut will be saved.
D) taxes vary directly with income.

Question

Quizplus · Accepted Answer

A portion of a tax cut will be saved rather than spent, which means not all of the tax cut translates into immediate demand for goods and services. In contrast, a direct increase in government spending goes entirely into the economy as demand, thus having a greater impact on the equilibrium GDP.

A $1 Increase in Government Spending on Goods and Services