Which of the following best explains why a $7 billion tax cut can lead to a $9 b

Question

Which of the following best explains why a $7 billion tax cut can lead to a $9 billion increase in consumer spending in the short run?

A.

Tax cuts increase disposable income, which leads to a higher national income and additional consumer spending.

B.

Tax cuts reduce government spending, which encourages consumer spending.

C.

Tax cuts reduce interest rates, which stimulates consumer spending and borrowing.

D.

Tax cuts increase government transfer payments, which leads to a higher national income and additional consumer spending.

Explanation / Answer

The answer to this is simple in nature. Whenever there is reduction in the taxes the disposable income with the people goes up and they spend more. Therefore the correct option is Tax cuts increase disposable income, which leads to a higher national income and additional consumer spending.

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