An Increase in Taxes of a Given Amount Will Have

question 97

Multiple Choice

An increase in taxes of a given amount will have a smaller impact on real GDP than a decrease in government purchases of equal amount because

• A)tax increases reduce the incentive to spend and invest.
• B)some of the additional tax will come from disposable income that would have been saved.
• C)the decline in disposable income is less than the tax increases.
• D)government purchases are subject to a larger multiplier than consumption purchases.
• E)declines in government purchases occur only in textbooks,never in reality.

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Definitions:

Consumption

Households' utilization of both products and services.

MPS

The marginal propensity to save, which is the fraction of additional income that is saved.

Disposable Income

The fiscal envelope for household spending and saving activity subsequent to income tax adjustments.

Consumption

The purchase and use of goods and services by households, considered a primary component of economic activity and an indicator of the economic health of a nation.