Question

There is a debate in Congress as to whether to decrease personal income taxes by a given amount or to increase government purchases by this amount. Which of these two fiscal policies will have a larger impact on real gross domestic product? Explain.

Answer 1

Answer: Increase in government spending would affect the economy more.

Explanation:

This is because the multiplier of Gross is higher than that of the tax multiplier. Also, some portion of the tax cuts may not be spent.