Question

The effect of a decline in taxes on the level of income will differ somewhat from an increase in government expenditures of the same amount because a. tax declines tend to be more expansionary b. households may not spend all of an increase in disposable income. c. the MPC that applies to the incomes of households always exceeds the MPC that applies to business incomes. d. the multiplier is high when the MPS is low.

Answer 1

Answer:

b. households may not spend all of an increase in disposable income.

Explanation:

Reduction of taxes and an increase in government spending are both expansionary fiscal policies undertaking by a government. Their objective to stimulate economic growth in times of economic downturns. Reducing taxes and increase government spending increases the money supply in the economy.

An increase in the money supply increases the demand for goods and services. Firms increases production to meet the new demand.  Increased government expenditure is likely to be effective in stimulating economic growth than reducing taxes with a similar amount. The government will spend the entire amount of public projects which achieve the desired effects. A reduction in taxes may not be as effective because households may not consume the entire amount as intended.