The Effect of a Change in Taxes Is Less Than

question 16

Multiple Choice

The effect of a change in taxes is less than the same sized change in government expenditure because

• A)some people do not pay their taxes.
• B)tax rates are the same regardless of income levels.
• C)the amount by which consumption initially changes is equal to MPS times the tax change.
• D)the amount by which consumption initially changes is equal to MPC times the tax change.
• E)changes in government expenditure do not directly affect consumption.

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Definitions:

Capital Lease

A lease agreement in which the lessee records the leased asset as if it was purchased with financing, reflecting it on their balance sheet.

Interest Rate

The percentage at which interest is paid by a borrower for the use of money that they borrow from a lender.

Cash Equivalent

Short-term, highly liquid investments that are easily convertible to known amounts of cash and have original maturities of three months or less.

Non-Interest-Bearing Note

A debt instrument that does not accrue interest over its life, meaning it is issued at its face value and repaid at the same amount without additional interest payments.