Clinton and Trump on fiscal policy n the 2016 Presidential election campaign, bo

Question

Clinton and Trump on fiscal policy n the 2016 Presidential election campaign, both Hillary Clinton and Donald Trump committed to big government infrastructure spending and tax outs 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? see 0 A. A cut in taxes O B. An increase in infrastructure spending C, A combination of an increase in infrastructure spending and an equal cut in tan- D. Neither an increase in infrastructure spending nor a cut in taxes will influence aggregate demand

Explanation / Answer

now before teh answer we need to know what multiplie ris, it is basically the va;lue or the factor by which the output changes due to a certain amount ofd change in the spendings or the taxcut,

now the multiolier for the spenidngs is givenm by 1/MPS where mps is marginal propensity to save, and tax multiplier is given by MPC/MPS, where mpc is marginal propensity to consume, both the propensities have value between 0 and 1 and they sum upto 1,

so we can see that spendings multiplier is greater than the tax multiplier

soo change in spendings will have more effect omn the aggregate output.

so answer here is B

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