Brief Principles of Macroeconomics...
Brief Principles of Macroeconomics...
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
The impact on aggregate demand by tax cuts and government spending.
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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