Suppose there are two policy options facing a vote in the Senate. In the first, government spending will increase $100 billion, while the second option is to cut taxes by $100 billion. A Keynesian economist would argue for
A) the tax option because it also affects the incentives workers face. Long-run aggregate supply will increase with the tax cut, but not with the spending increase.
B) the tax option because it is easier to pass. The effects on total spending would be identical.
C) the spending option because it won't affect the deficit the way the tax cut would.
D) the spending option because it has a bigger impact on total spending. The spending directly raises total spending plus it works through the multiplier, while the tax cut only works through the multiplier.

Question

Quizplus · Accepted Answer

A Keynesian economist would recommend the spending option over the tax cut because it directly increases total spending and works through the multiplier effect. While the tax cut may have some impact on long-run aggregate supply, in the short run, it only works through the multiplier effect, making it less effective at boosting aggregate demand than the spending option. Additionally, the tax cut would increase the deficit, whereas the spending increase may be financed through borrowing or money creation, which could further stimulate aggregate demand.

Suppose There Are Two Policy Options Facing a Vote in the Senate