Question

6. Changes in taxes

The following graph shows the aggregate demand curve.

Shift the aggregate demand curve on the graph to show the impact of a tax cut.

Suppose the governments of two different economies, economy X and economy Y, implement a permanent tax cut of the same size. The marginal propensity to consume (MPC) in economy X is 0.75 and the MPC in economy Y is 0.8. The economies are identical in all other respects.

The tax cut will have a larger impact on aggregate demand in the economy with the (larger MPC/ smaller MPC)

Answer 1