Question

If a government wants to pursue an expansionary fiscal policy, then a tax cut of a certain size will be more expansionary when the:
A) Economy's MPS is small
B) Economy's MPS is large
C) Economy's MPC is small
D) Unemployment rate is low

Answer 1

Answer:

The correct answer is A

Explanation:

Expansionary fiscal policy is a kind of fiscal policy which includes, increasing government expenditures, decreasing taxes or both,so to fight the pressure of recessionary . A decrease in taxes means that households have more disposal income to spend

And if the government want to go with this policy, then the tax cut will be more expansionary when the economy MPS (Marginal propensity to save) is small because the huge the multiplier, the more economic impact will change in the government spending.