Which is more likely to stimulate aggregate demand in a timely manner?
A) a tax cut, because households will increase their consumption by the full amount of their tax reduction
B) a tax cut, because disbursement can take place quickly while spending increases are generally spread out over several years
C) a spending increase, because disbursement can take place quickly while a tax cut will be spread out over several years
D) a spending increase, because it can be easily reversed once the economy has recovered

Question

Quizplus · Accepted Answer

A tax cut can stimulate aggregate demand quickly because disbursement can take place quickly. While spending increases are generally spread out over several years, a tax cut can provide households with additional disposable income, which they can use to increase their consumption immediately. However, it is important to note that the effectiveness of a tax cut depends on how households choose to use the additional income. If they choose to save it, the increase in aggregate demand may be limited. Choice A is incorrect because households may not necessarily increase their consumption by the full amount of their tax reduction. Choice C is incorrect because a spending increase will also be spread out over several years. Choice D is incorrect because it is not easy to reverse spending once it has been allocated.

Which Is More Likely to Stimulate Aggregate Demand in a Timely