When the government reduces taxes:[Fill in the blank]

Question

BlackTom AI · Accepted Answer

A tax cut raises households’ disposable income, which they split between additional consumption and additional saving according to their marginal propensities to consume and save.

1) Relevant knowledge points and concepts
- Disposable income (Yd) = income (Y) − taxes (T). A reduction in T raises Yd.
- Marginal propensity to consume (MPC) is the fraction of an extra dollar of Yd that is consumed; marginal propensity to save (MPS) is the fraction that is saved. MPC + MPS = 1 and both are nonnegative in normal circumstances.
- Any positive ΔYd will typically generate ΔC = MPC × ΔYd > 0 and ΔS = MPS × ΔYd > 0, so both consumption and saving increase.

2) Step-by-step reasoning
- Start: government reduces taxes by ΔT < 0.
- Effect on disposable income: ΔYd = −ΔT > 0 (because taxes fall).
- Allocation: ΔC = MPC × ΔYd, ΔS = MPS × ΔYd.
- Since MPC and MPS are between 0 and 1 and sum to 1, both ΔC and ΔS are positive for any positive ΔYd.

3) Calculations (intermediate steps shown)
- Example numeric: let ΔT = −$100, MPC = 0.8 → ΔYd = $100.
- Then ΔC = 0.8 × $100 = $80 (consumption rises by $80).
- ΔS = 0.2 × $100 = $20 (saving rises by $20).

4) Why the correct answer is correct
- Because a tax reduction increases take-home pay (disposable income), households will use part of it to consume and part to save. Both components therefore increase, which matches option (a).

5) Why the other options are incorrect
- (b) claims take-home pay decreases — false, the opposite occurs. 
- (c) claims saving is unaffected — incorrect unless MPS = 0 (an extreme, unrealistic assumption); generally saving rises too.
- (d) claims consumption is unaffected — incorrect unless MPC = 0 (also unrealistic); generally consumption rises.

6) Conclusion
- Therefore households’ take-home pay increases, households’ saving increases, and households’ consumption increases — option a, which matches the provided correct answer.

When the government reduces taxes:[Fill in the blank]单项选择题

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