The effect of a change in taxes is less than the same sized change in government expenditure because
A)the amount by which consumption initially changes is equal to MPC times the tax change.
B)some people do not pay their taxes.
C)changes in government expenditure do not directly affect consumption.
D)tax rates are the same regardless of income levels.
E)none of the above

Question

Quizplus · Accepted Answer

The initial change in consumption due to a tax change is equal to the marginal propensity to consume (MPC) times the tax change, which is less than the full amount of the tax change. In contrast, a change in government expenditure directly affects aggregate demand by the full amount of the expenditure change.

The Effect of a Change in Taxes Is Less Than