An increase in government spending
A)does not affect the present value of taxes, thus does not affect the lifetime wealth of consumers.
B)increases taxes and increases the marginal propensity to consume.
C)reduces taxes and reduces lifetime wealth of consumers.
D)increases taxes and reduces lifetime wealth of consumers.
E)increases taxes and reduces the marginal propensity to consume.

Question

Quizplus · Accepted Answer

An increase in government spending usually leads to an increase in taxes to finance the spending. This increase in taxes reduces the lifetime wealth of consumers. Hence, option D is the correct choice. Option A is not correct because an increase in government spending will lead to an increase in taxes, which will affect the present value of taxes and reduce the lifetime wealth of consumers. Option B is not correct because an increase in government spending may not necessarily increase the marginal propensity to consume. Option C is not correct because an increase in government spending leads to an increase in taxes, which will reduce the lifetime wealth of consumers. Option E is not correct because an increase in taxes reduces the marginal propensity to consume.

An Increase in Government Spending