Anne and Charlie Are Discussing the Best Possible Fiscal Policy

question 46

Multiple Choice

Anne and Charlie are discussing the best possible fiscal policy to bring the country out of a recession. Charlie wants to see government reduce taxes by $100 billion. Anne prefers to see government spending increase by $100 billion. Whose proposition would have the larger total impact on aggregate demand?

• A) Anne's, because the government has more information available to it than do households and firms
• B) Anne's, because all of the additional government spending will enter the spending stream, while part of a tax cut would be saved and not spent
• C) Charlie's, because households and firms have a higher marginal propensity to consume than the government
• D) Charlie's, because firms and households are better spenders than the government, whose spending decisions are bogged down in political debating

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