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)only part of the tax increase will affect the consumption negatively.

Question

Quizplus · Accepted Answer

Only part of the tax increase will affect consumption negatively because people may reduce their savings or borrow to maintain their consumption levels, whereas a decline in government spending directly reduces aggregate demand.

An Increase in Taxes of a Specific Amount Will Have