The argument that the primary impact of the 1981 tax cut was on aggregate demand is based on the fact that
A) output did not rise sufficiently to offset the effect of the tax cuts on the size of the federal deficit.
B) unemployment rose significantly after the tax cut, necessitating increased federal welfare.
C) after the tax cut, the velocity of circulation of the money supply rose at a rapid rate.
D) the inflationary pressures in the economy after the tax cut were greater than the pre-tax cut rate of inflation.
E) the United States ran a balance of payments surplus for the first time in the post-Vietnam War era two years after the tax cut.

Question

Quizplus · Accepted Answer

The argument that the primary impact of the 1981 tax cut was on aggregate demand is based on the fact that output did not rise sufficiently to offset the effect of the tax cuts on the size of the federal deficit. This suggests that the tax cut had a greater impact on increasing demand (through increased consumer spending) than on increasing supply (through increased production). The resulting increase in the federal deficit also suggests that the tax cut may have contributed to inflationary pressures in the economy.

The Argument That the Primary Impact of the 1981 Tax