Question

If a government wants to pursue an expansionary fiscal policy, then a tax cut of a certain size will be more expansionary the: 
A. Smaller is the economy's MPS
B. Larger is the economy's MPS
C. Smaller is the economy's MPC
D. Larger is the unemployment rate

Answer 1

Answer:

The correct answer is option A.

Explanation:

An expansionary fiscal is adopted to boost economic activities. It is used in case of a recession. The main tools of expansionary fiscal policy are a decrease in taxes and an increase in government spending.

A cut in taxes will be more expansionary if the MPS or marginal propensity to save is smaller. Smaller MPS means when the disposable income increases because of the tax cut, the consumers will save less and consume more of their income. This will cause an increase in demand and consequently, an increase in output and employment.