Which of the following tends to increase economic growth?
A)a decrease in taxes, holding government spending constant
B)a reduction in government spending, holding taxes constant
C)an increase in government spending, holding taxes constant
D)an increase in taxes, holding government spending constant

Question

Quizplus · Accepted Answer

A reduction in government spending, holding taxes constant, tends to increase economic growth because it frees up resources for private firms and individuals to invest in productive activities. This increases productivity and leads to more economic output, which in turn spurs economic growth. A decrease in taxes, holding government spending constant, may also stimulate economic growth, but it depends on how the tax cut is financed and whether it leads to higher deficits or crowding out of private investment. An increase in government spending, holding taxes constant, may or may not stimulate economic growth, depending on how the spending is financed and whether it leads to productivity-enhancing investments or just creates a short-term boost to demand. An increase in taxes, holding government spending constant, tends to reduce economic growth because it leaves less money in the hands of private firms and individuals to invest and spend.

Which of the Following Tends to Increase Economic Growth