A decrease in taxes of a given amount will have a smaller impact upon the aggregate demand curve than will a rise in government purchases of the same amount because:
A)the MPC is smaller in the private sector than it is in the public sector
B)increases in government purchases always tend to reduce private investment
C)aggregate demand is not affected by tax cuts
D)some of the tax cut will not be spent
E)exports rise with an increase in government purchases

Question

Quizplus · Accepted Answer

When taxes are decreased, some of the extra money saved will not be spent and instead will be saved or used to pay off debt. However, when government purchases increase, all the money spent will go directly into the economy and impact aggregate demand. Therefore, tax cuts have a smaller impact on the aggregate demand curve than an increase in government purchases of the same amount. Choices A, B, C, and E are incorrect because they do not provide a valid explanation for why tax cuts have a smaller impact on the aggregate demand curve.

A Decrease in Taxes of a Given Amount Will Have