An increase in taxes of a specific amount will have a smaller impact on the equilibrium GDP than will a decline in government spending of the same amount because:
A) the MPC is smaller in the private sector than it is in the public sector.
B) declines in government spending always tend to stimulate private investment.
C) disposable income will fall by some amount smaller than the tax increase.
D) some of the tax increase will be paid out of income that would otherwise have been saved.

Question

Quizplus · Accepted Answer

Some of the tax increase will be paid out of income that would otherwise have been saved, reducing the overall impact on consumption and thus having a smaller effect on equilibrium GDP compared to a direct reduction in government spending.

An Increase in Taxes of a Specific Amount Will Have