Usually, the reduction in the taxes will have _______ multiplier effect compared to an increase in government spending on aggregate demand.
Show answer & explanation
Correct answer: B
Explanation
The correct answer is option 2 i.e. smaller.
The reduction in taxes will have a smaller multiplier effect compared to an increase in government spending on aggregate demand. This is because government spending directly increases demand for goods and services, whereas a tax cut may not translate into increased spending by households to the same extent, as people might save a portion of the tax savings.