Question : Usually, the reduction in the taxes will have ____________ multiplier effect compared to an increase in government spending on aggregate demand.
Option 1: no
Option 2: smaller
Option 3: higher
Option 4: equivalent
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Correct Answer: smaller
Solution : The correct answer is smaller .
When the government increases its expenditure on the economy, demand increases by the same amount. And a reduction in taxes increases the disposable income of individuals. The change in aggregate demand caused by a change in government spending is greater or greater than that caused by a change in tax.
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