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, however it is financed, never raises aggregate demand at all.
- Households' expectations about future taxes can affect how much a stimulus raises demand.
- Governments ought to fund any stimulus purely by borrowing rather than by raising taxes.
- When households save a stimulus windfall, they always correctly predict future tax hikes.
- During a downturn, household saving does more good for the economy than spending does.
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