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.

Question

Quizplus · Accepted Answer

The demand-side effect of a tax change is less than that of a government expenditure change because when taxes are cut, not all of the increase in disposable income is spent. Some of it is saved, reducing the impact on aggregate demand compared to direct government spending, where all the expenditure directly affects demand.

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