Learning Path
Question & Answer1
Understand Question2
Review Options3
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Explore TopicChoose the Best Answer
A
An increase in government spending will always lead to a greater than proportional increase in aggregate demand.
B
The tax multiplier is always positive, reflecting an increase in consumption from tax cuts.
C
A higher marginal propensity to save (MPS) results in a smaller spending multiplier.
D
The spending multiplier can be influenced by the level of consumer confidence in the economy.
E
Tax multipliers are unaffected by changes in the marginal propensity to consume (MPC).
Understanding the Answer
Let's break down why this is correct
Answer
Spending and tax multipliers are important concepts in economics that help us understand how changes in government spending or taxes can affect the overall economy, specifically aggregate demand. When the government increases its spending, it directly puts more money into the economy, which can lead to more jobs and increased consumer spending. For example, if the government spends money to build a new road, construction workers get paid, and they then spend that money on food and other goods, creating a ripple effect. On the other hand, when taxes are cut, people have more money in their pockets, which can also boost spending, but the effect is usually smaller than direct government spending. Overall, both multipliers show how interconnected spending and income are in influencing the economy's total demand for goods and services.
Detailed Explanation
All the statements misunderstand how spending and tax multipliers work in the economy. Other options are incorrect because This statement suggests that government spending always boosts demand a lot; It assumes tax cuts always lead to more spending.
Key Concepts
Spending and Tax Multipliers
Aggregate Demand
Fiscal Policy
Topic
Spending and Tax Multipliers
Difficulty
medium level question
Cognitive Level
understand
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