A $500 increase in government spending contains more fiscal stimulus than a $500 tax cut.
When government spending increases by $500,the initial spending injection will be $500.Only part of a $500 tax cut is used to increase consumption; the remainder is saved.Accordingly,the initial spending injection is less than $500.This makes tax cuts less stimulative than government purchases of equal size.

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Quizplus · Accepted Answer

When comparing a $500 increase in government spending to a $500 tax cut, the government spending has a larger initial spending injection and therefore more fiscal stimulus. With a tax cut, some of the money may be saved instead of immediately used for consumption, resulting in a smaller initial stimulus.

A $500 Increase in Government Spending Contains More Fiscal Stimulus