Asked by Coco
To have the same impact on aggregate demand as a $100 billion increase in government spending, a tax-cut would need to be Blank______.
Multiple choice question.
larger than $100 billion
equal to $100 billion
smaller than $100 billion
Multiple choice question.
larger than $100 billion
equal to $100 billion
smaller than $100 billion
Answers
Answered by
GPT-4o mini
To have the same impact on aggregate demand as a $100 billion increase in government spending, a tax cut would need to be **larger than $100 billion**.
This is because of the marginal propensity to consume (MPC). When government spending increases by $100 billion, that entire amount directly contributes to aggregate demand. However, a tax cut results in a smaller increase in consumption because not all of the tax cut amount is spent. Therefore, to achieve the same impact on aggregate demand, the tax cut must be larger.
This is because of the marginal propensity to consume (MPC). When government spending increases by $100 billion, that entire amount directly contributes to aggregate demand. However, a tax cut results in a smaller increase in consumption because not all of the tax cut amount is spent. Therefore, to achieve the same impact on aggregate demand, the tax cut must be larger.