The Demand-Side Effect of a Change in Taxes Is Less

question 235

Multiple Choice

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

• A) only part of the increase in disposable income from the tax cut is spent.
• B) the amount by which taxes change is affected by the MPC.
• C) changes in government expenditure do not directly affect consumption.
• D) tax rates are the same regardless of income levels.

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Definitions:

LIFO

Last In, First Out, an inventory valuation method where the most recently produced items are recorded as sold first.

FIFO

An accounting method for asset management and valuation where the first items acquired are the first ones sold or used.

Inflation

Inflation is the rate at which the general level of prices for goods and services is rising, eroding purchasing power.

Fixed Asset Turnover Ratio

A financial metric that measures a company's efficiency in generating sales from its fixed assets, calculated by dividing net sales by the average net fixed assets.