There is a debate in congress as to whether to decrease personal income taxes by a given amount or to increase government purchases by this amount. Which of these two fiscal policies will have a larger impact on real gross domestic product?

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Business

Elvis Walters

31 March, 18:26

There is a debate in congress as to whether to decrease personal income taxes by a given amount or to increase government purchases by this amount. Which of these two fiscal policies will have a larger impact on real gross domestic product?

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Mariana Best · Answer 1

Increase in government purchases will have a larger impact om real gross domestic. products.

Explanation:

Consumers' behaviors are unpredictable and they also have a choice between spending the increase in their disposable income due to the decrease in personal taxes and saving.

Consumers can choose to save this increase rather than spending it. And when it is saved it has little impact real gross domestic product.

Whereas if it is government, increase government purchases has direct impact on real gross domestic product. Its multiplier's effect is larger than that of the consumers'