Ignoring any supply-side effects,suppose the government is considering cutting taxes by $100 billion or increasing government expenditures on goods and services by $100 billion.Then
A)both policies would increase aggregate demand by the same amount.
B)both policies would increase aggregate demand but the tax cut has a smaller effect.
C)both policies would increase aggregate demand but the increase in government expenditure has a smaller effect.
D)the tax cut would decrease aggregate demand and the increase in government expenditure would increase aggregate demand.
E)the tax cut would increase aggregate demand and the increase in government expenditure would decrease aggregate demand.

Question

Quizplus · Accepted Answer

Both tax cuts and an increase in government expenditures increase aggregate demand, but the tax cut has a smaller effect. This is because some of the tax cut may be saved rather than spent, whereas government spending goes directly into the economy.

Ignoring Any Supply-Side Effects,suppose the Government Is Considering Cutting Taxes