Anne and Charlie are discussing the best fiscal policy to bring the country out of a recession.Charlie wants to see government cut taxes by $100 billion.Anne prefers to see government spending increase by $100 billion.Whose prescription would have the larger total impact on aggregate demand?

Question

Quizplus · Accepted Answer

Anne's prescription of increasing government spending by $100 billion would have a larger impact on aggregate demand than Charlie's proposal of cutting taxes by the same amount. This is because when the government spends, the entire amount is injected directly into the economy, whereas with a tax cut, some of the money may be saved or used to pay off debt, rather than spent. Additionally, households and firms may not immediately increase their spending in response to a tax cut, whereas government spending would have an immediate impact on increasing aggregate demand.

Anne and Charlie Are Discussing the Best Fiscal Policy to Bring