ECONOMICS
AGGREGATE DEMAND
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Question
[CLICK ON ANY CHOICE TO KNOW THE RIGHT ANSWER]
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Consumers do not reduce their spending by the full amount of the tax increase.
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The government purchases some goods that consumers would have purchased on their own anyway.
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Consumers believe all tax cuts are transitory.
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The increase in government spending causes a decrease in investment.
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Consumers are aware of tax increases but not of increases in government spending.
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Detailed explanation-1: -Let us learn about Government Expenditure Multiplier of National Income. Like private investment, an increase in government spending results in an increase in national income. This suggests that its effect on national income is expansionary.
Detailed explanation-2: -Answer and Explanation: The correct answer is (c) of the multiplier effect.
Detailed explanation-3: -Which of the following is a reason a government might increase government spending? It is concerned that the unemployment rate is too high.
Detailed explanation-4: -This is because when the government spends money, it directly purchases something, causing the full amount of the change in expenditure to be applied to the aggregate demand. When the government cuts taxes instead, there is an increase in disposable income.