A tax cut has a smaller impact on aggregate demand than an increase in government purchases of the same size because

Question

Quizplus · Accepted Answer

When a tax cut is given, a portion of the cut is often saved by households rather than spent, which means the increase in aggregate demand is less than the amount of the tax cut. On the other hand, when the government purchases goods or services, there is a direct increase in aggregate demand because the government is spending money on goods or services that would not have been purchased otherwise.

A Tax Cut Has a Smaller Impact on Aggregate Demand