A $100 billion increase in government purchases has a greater effect on real GDP than a $100 billion reduction in net taxes because
A)some of the income consumers gain from the tax reduction will be saved rather than spent
B)some of the income consumers gain from the tax reduction will be spent on services rather than products
C)some of the income consumers gain from the tax reduction will be spent on goods made in foreign countries
D)the consumers' MPC is higher than the government's
E)the consumers' MPC is 1

Question

Quizplus · Accepted Answer

A $100 billion increase in government purchases directly adds to aggregate demand and therefore has a larger multiplier effect on real GDP than a $100 billion reduction in net taxes, where some of the additional income may be saved rather than spent, decreasing the overall impact on demand.

A $100 Billion Increase in Government Purchases Has a Greater