Suppose there are two policy options facing a vote in the Senate. In the first, government spending will increase $50 billion, while the second option is to cut taxes by $50 billion. A Keynesian economist would argue for
A)the tax option because it also affects the incentives workers face. Long-run aggregate supply will increase with the tax cut, but not with the spending increase.
B)the tax option because it is easier to pass. The effects on total spending would be identical.
C)the spending option because it won't affect the deficit the way the tax cut would.
D)the spending option because it has a bigger impact on total spending. The spending directly raises total spending plus it works through the multiplier, while the tax cut only works through the multiplier.

Question

Quizplus · Accepted Answer

A Keynesian economist would argue for the spending option because it has a bigger impact on total spending. The spending directly raises total spending, and it also works through the multiplier, while the tax cut only works through the multiplier. Cutting taxes could potentially increase aggregate demand through increased disposable income, but there is no guarantee that the additional income will be spent. In contrast, government spending would directly boost demand and have a larger impact on boosting economic output.

Suppose There Are Two Policy Options Facing a Vote in the Senate