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Brief Principles of Macroeconomics...

8th Edition
N. Gregory Mankiw
ISBN: 9781337091985

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BuyFindarrow_forward

Brief Principles of Macroeconomics...

8th Edition
N. Gregory Mankiw
ISBN: 9781337091985
Textbook Problem

According to traditional Keynesian analysis, which of the following will increase aggregate demand the most?

a. $100 billion increase in taxation

b. $100 billion decrease in taxation

c. $100 billion increase in government spending

d. $100 billion decrease in government spending

To determine

The impact on aggregate demand by tax cuts and government spending.

Explanation

Option (c):

Traditional Keynesian analysis indicates that a dollar of additional government spending is a more potent tool than a dollar of tax cuts that increases the aggregate demand. Therefore, $100 billion increase in government spending has more of an impact on increasing aggregate demand. Thus, option ‘c’ is correct.

Option (a):

$100 billion increase in taxation reduces the amount saved and has little effect on aggregate demand. Thus, option ‘a’ is incorrect...

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