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Tax cuts may fail to add much to consumer spending, and hence may not increase aggregate demand very much, because

a. lower taxes automatically reduce transfer payments, so there is no net effect on disposable income.
b. households may save their added disposable income, rather than spend it, meaning the marginal propensity to consume is small.
c. households may spend their added disposable income, rather than save it, meaning the marginal propensity to consume is large.
d. lower taxes automatically increase transfer payments, so there is no net effect on disposable income.

Microeconomics, Economics

  • Category:- Microeconomics
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