Depending on the size of the multiplier and crowding-out effects, the rightward shift in aggregate demand from a tax cut could be larger or smaller than the tax cut.

Question

Quizplus · Accepted Answer

The size of the multiplier effect, which amplifies the initial increase in aggregate demand from a tax cut, and the extent of crowding-out effects, which can dampen this increase by raising interest rates and reducing investment, together determine whether the overall shift in aggregate demand is larger or smaller than the initial tax cut.

Depending on the Size of the Multiplier and Crowding-Out Effects