When comparing a $100 billion increase in government expenditure to a $100 billion decrease in tax revenue,the effect of the increase in government expenditure on aggregate demand is
A)greater than the effect of the tax decrease.
B)equal to the effect of the tax decrease.
C)less than the effect of the tax decrease.
D)positive whereas the effect of the tax decrease is negative.
E)negative whereas the effect of the tax decrease is positive.

Question

Quizplus · Accepted Answer

An increase in government expenditure directly increases aggregate demand by the full amount, while a tax decrease increases disposable income, leading to a smaller increase in aggregate demand due to the marginal propensity to consume being less than one.

When Comparing a $100 Billion Increase in Government Expenditure to a $100