A tax increase has a smaller impact on the economy than does a decrease in government spending of the same magnitude because
A) Congress is slow in passing tax increases.
B) consumers pay for part of the tax increase by reducing their savings.
C) tax changes have more of a direct impact on income than does an equivalent change in government spending.
D) fiscal policy is weaker than monetary policy.

Question

Quizplus · Accepted Answer

Consumers often offset part of a tax increase by reducing their savings, which means the immediate reduction in consumption is less than it would be for an equivalent cut in government spending. This is because a decrease in government spending directly pulls money out of the economy, while a tax increase indirectly affects spending by reducing disposable income, part of which can be absorbed by savings.

A Tax Increase Has a Smaller Impact on the Economy