How does a decrease in autonomous net taxes affect GDP?
A) It increases GDP as much as an equal decrease in government purchases.
B) It increases GDP less than an equal increase in government purchases.
C) It decreases GDP more than an equal decrease in government purchases.
D) It changes GDP in an unpredictable manner.

Question

How does a decrease in autonomous net taxes affect GDP?  
A) It increases GDP as much as an equal decrease in government purchases. 
B) It increases GDP less than an equal increase in government purchases. 
C) It decreases GDP more than an equal decrease in government purchases. 
D) It changes GDP in an unpredictable manner.

Quizplus · Accepted Answer

An increase in government purchases has a direct impact on GDP because it increases demand for goods and services in the economy. However, a decrease in autonomous net taxes may not translate into an equivalent increase in demand because it depends on how individuals and firms choose to spend or save the extra income they receive. Some of the tax savings may be saved rather than spent, which reduces the multiplier effect and limits the impact on GDP. Therefore, a decrease in autonomous net taxes increases GDP less than an equal increase in government purchases.

How Does a Decrease in Autonomous Net Taxes Affect GDP