📚 Learning Guide
Spending and Tax Multipliers
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Spending is to the spending multiplier as tax cuts are to what?

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Learning Path

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Choose the Best Answer

A

Tax multiplier

B

Government revenue

C

Aggregate supply

D

Budget deficit

Understanding the Answer

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Answer

Spending is related to the spending multiplier because when the government spends money, it can lead to a larger increase in overall economic activity. Similarly, tax cuts relate to the tax multiplier, which shows how much economic activity increases when people have more money to spend due to lower taxes. For example, if the government cuts taxes, people will have extra money to buy things, which can lead businesses to hire more workers or make more products. This cycle continues, just like with spending, but the effects of tax cuts are measured differently. So, while spending creates a direct effect through the spending multiplier, tax cuts create a different but related effect through the tax multiplier.

Detailed Explanation

When the government cuts taxes, people have more money to spend. Other options are incorrect because Some might think tax cuts directly increase government revenue; People may confuse tax cuts with aggregate supply, which is about how much goods and services are produced.

Key Concepts

Spending and Tax Multipliers
Fiscal Policy Impact
Aggregate Demand
Topic

Spending and Tax Multipliers

Difficulty

medium level question

Cognitive Level

understand

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