A reduction in direct taxes will result in:[Fill in the blank]

Question

BlackTom AI · Accepted Answer

A reduction in direct taxes increases households’ disposable income, so aggregate demand (AD) shifts to the right, raising output and the price level — especially when the economy is near full employment.

1) Relevant concepts:
- Consumption function and marginal propensity to consume (MPC): a tax cut raises disposable income, leading to higher consumption = MPC × Δ(disposable income).
- Tax multiplier: ΔY = (−MPC / (1 − MPC)) × ΔT, so a tax cut (ΔT < 0) yields ΔY > 0.
- AD–AS interaction near full employment: short‑run aggregate supply (SRAS) is steep/inelastic, so rightward AD shifts produce more inflation than output gain.

2) Step‑by‑step reasoning:
- A direct tax cut raises after‑tax income for workers/households.
- Households spend a fraction MPC of that extra income; this initial increase in consumption induces further rounds of spending (multiplier effect).
- Algebraic illustration: take MPC = 0.8 and ΔT = −100. Tax multiplier = −MPC/(1−MPC) = −0.8/0.2 = −4. Then ΔY = (−4) × (−100) = +400, showing a positive increase in national income/output from the tax cut.
- Graphically, AD shifts right. If the economy is far from capacity, the output increase could be large with modest inflation. But near full employment SRAS is steep: the same AD shift yields only a small increase in output and a relatively larger increase in the price level (a little inflation).

3) Why the correct answer is correct:
- Option (a) states an increase in output and a little inflation if the economy is near full employment, which matches the predicted small output gain and upward pressure on prices from an AD rightward shift when SRAS is inelastic.

4) Why the other options are wrong:
- (b) claims a decrease in inflation — incorrect because AD rises and thus tends to increase, not decrease, the price level.
- (c) says a leftward shift in AD — wrong direction; tax cuts boost demand, causing a rightward shift.
- (d) says no shift in AD — incorrect because disposable income and consumption change, so AD shifts.

Conclusion: therefore option (a) is correct, matching the provided answer.

A reduction in direct taxes will result in:[Fill in the blank]单项选择题

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