Learning Path
Question & Answer1
Understand Question2
Review Options3
Learn Explanation4
Explore TopicChoose the Best Answer
A
The spending multiplier effect is stronger than the tax multiplier effect.
B
Higher taxes always lead to increased consumer spending.
C
Increased taxes directly lead to higher government savings, which boosts output.
D
The government spending has no effect on aggregate demand.
Understanding the Answer
Let's break down why this is correct
Answer
When the government increases both spending and taxes by the same amount, it can still lead to an overall increase in economic output because of how money flows in the economy. When the government spends money, it creates demand for goods and services. For example, if the government spends $100 million on building roads, this money goes to construction workers, suppliers, and other businesses, which can help them grow and hire more people. Although taxes also go up by $100 million, the initial boost from government spending can create a ripple effect where more jobs and income are generated. This means that the total impact of the spending can be greater than the negative impact of the taxes, leading to an overall increase in economic activity.
Detailed Explanation
When the government spends money, it creates jobs and boosts demand. Other options are incorrect because People often think that higher taxes mean they will spend more; Some believe that higher taxes help the government save money, which helps the economy.
Key Concepts
Balanced Budget Multiplier Effects
Government Spending and Taxation
Aggregate Demand
Topic
Balanced Budget Multiplier Effects
Difficulty
hard level question
Cognitive Level
understand
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