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

1 answer

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.