A tax increase has a smaller impact on the economy than does a decrease in government spending of the same magnitude because:
A) Congress drags its feet in passing tax increases.
B) consumers pay for part of the tax increase by reducing their saving.
C) tax changes have more of a direct impact on income than does an equivalent change in government spending.
D) fiscal policy is weaker than monetary policy.

Question

Quizplus · Accepted Answer

Consumers may adjust their savings to accommodate a tax increase, which can mitigate its impact on overall consumption and economic activity, whereas a decrease in government spending directly reduces aggregate demand.

A Tax Increase Has a Smaller Impact on the Economy