In the IS-LM analysis, the increase in income resulting from a tax cut is usually ______ the increase in income resulting from an equal rise in government spending.
A) less than
B) greater than
C) equal to
D) sometimes less and sometimes greater than

Question

Quizplus · Accepted Answer

According to the IS-LM analysis, a tax cut increases the disposable income of consumers, which leads to an increase in consumption spending. However, some individuals may choose to save or pay off debt with the additional income, which limits the stimulative effect on the economy. On the other hand, an equal rise in government spending directly increases aggregate demand in the economy, leading to a larger increase in income. Therefore, the increase in income resulting from a tax cut is usually less than the increase in income resulting from an equal rise in government spending.

In the IS-LM Analysis, the Increase in Income Resulting from a Tax