Question

Clinton and Trump on fiscal policy In the 2016 Presidential election​ campaign, both Hillary Clinton and Donald Trump committed to big government infrastructure spending and tax cuts. ​Source: The Wall Street Journal​, July​ 27, 2016 Consider an increase in infrastructure spending and a tax cut of the same magnitude. What policy will change aggregate demand the​ most: an increase in infrastructure spending or a cut in​ taxes?

Answer 1

Clinton and Trump on fiscal policy In the 2016 Presidential election​ campaign

The policy that will change aggregate demand (AD) the most is a cut in taxes.

Step-by-step explanation:

Aggregate demand is fueled mostly by household consumption. A cut in taxes increases the marginal propensity to consume (MPC) and reduces the marginal propensity to save (MPS), but at the same time fuels the marginal propensity to invest by firms trying to meet the new aggregate demand, thereby increasing the aggregate supply (AS) which is the real GDP output.