Question

Suppose that Congress enacts a significant tax cut with the expectation that this action will stimulate aggregate demand and push up real GDP in the short run. In fact, however, neither real GDP nor the price level changes significantly as a result of the tax cut. What might account for this outcome?

Answer 1

Tax reductions mean that more disposable income is available to people. But the increase in consumption depends on the marginal propensity to consume (MPC). If the MPC is too low, consumers will not consume the additional income made available to them through tax cuts.