A tax-cut will have a greater effect on equilibrium GDP if the:
A) Marginal propensity to consume is smaller
B) Marginal propensity to save is smaller
C) Marginal propensity to save is larger
D) Average propensity to consume is larger

Question

Quizplus · Accepted Answer

A tax cut will have a greater effect on equilibrium GDP if the marginal propensity to consume (MPC) is larger, as households are more likely to spend the extra income received from the tax cut. Therefore, a smaller marginal propensity to save (MPS) means that more of the extra income will be spent, leading to a larger increase in GDP.

A Tax-Cut Will Have a Greater Effect on Equilibrium GDP