Impact of Fiscal Policies on Aggregate Demand

Medium Macroeconomics Monetary And Fiscal Policy

In an economy experiencing a recession, the government is considering different policy options to stimulate economic activity. One option is to reduce the personal income tax rate, which aims to increase disposable income for consumers and boost consumption. Another option is to increase government spending on infrastructure projects, which would not only create jobs but also enhance productivity in the long term.

Given these scenarios, which of the following options best describes the impact of each policy on aggregate demand?

A decrease in personal income tax increases disposable income, thereby increasing aggregate demand more significantly than government spending on infrastructure.

Increasing government spending on infrastructure will have a larger multiplier effect, thus significantly increasing aggregate demand compared to a reduction in personal income tax.

Both policies will equally increase aggregate demand, as they are both fiscal measures.

Hint

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