medium · GMAT Verbal
When a government boosts spending in a downturn, the extra money is meant to lift demand. Some economists argue that if households expect the spending to be repaid through higher future taxes, they save the windfall to cover that tax bill rather than spending it. Demand then rises by less than the government injected.
If the economists' reasoning is correct, which of the following must be true?
- Fiscal stimulus never increases demand at all.
- Households' expectations about future taxes can affect how much a stimulus raises demand.
- Governments should fund stimulus only by borrowing, not by raising future taxes.
- Households always correctly predict future tax increases.
- Saving is more beneficial to the economy than spending during a downturn.
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