A tax cut shifts the aggregate demand curve the farthest if
A)the MPC is large and if the tax cut is permanent.
B)the MPC is large and if the tax cut is temporary.
C)the MPC is small and if the tax cut is permanent.
D)the MPC is small and if the tax cut is temporary.

Question

Quizplus · Accepted Answer

A tax cut shifts the aggregate demand curve the farthest if the marginal propensity to consume (MPC) is large and the tax cut is perceived as permanent. A large MPC means consumers are likely to spend a significant portion of any extra income they receive, and a permanent tax cut is more likely to encourage spending rather than saving, as people expect their higher disposable income to last.

A Tax Cut Shifts the Aggregate Demand Curve the Farthest