Question

Which of the following best explains the increase in national income that results from equal increases in government spending and taxes?

a) Consumers do not reduce their spending by the full amount of the tax increase.
b) The government purchases some goods that consumers would have purchased on their own anyway.
c) Consumers believe all tax cuts are transitory.
d) The increase in government spending causes a decrease in investment.
e) Consumers are aware of tax increases but not of increases in government spending.

Answer 1

The increase in national income that results from equal increases in government spending and taxes can be best explained by consumers not reducing their spending by the full amount of the tax increase.

Step-by-step explanation:

The increase in national income that results from equal increases in government spending and taxes can be best explained by option a) Consumers do not reduce their spending by the full amount of the tax increase.

When government spending and taxes both increase, consumers may not reduce their spending by the full amount of the tax increase. This is because some consumers may feel that the increase in government spending will have positive effects on the economy, such as creating more jobs or stimulating economic growth. As a result, they may continue to spend, leading to an increase in national income.

For example, if the government increases taxes to fund infrastructure projects, consumers may believe that these projects will benefit the overall economy and lead to job creation. In this case, they may be more willing to continue spending, even with the tax increase, which would result in an increase in national income.