A government decides to address income inequality and boost economic activity by increasing welfare transfer payments, funding this policy entirely through an increase in direct income taxes on high-income earners.
According to Keynesian consumption theory, what is the most likely net effect of this revenue-neutral fiscal policy on aggregate demand (ADADAD) and why?
Aggregate demand will increase because the marginal propensity to consume of transfer recipients is higher than that of high-income taxpayers.
Aggregate demand will decrease because the fall in disposable income of high-income earners will reduce investment and consumption by an equal amount.
Aggregate demand will remain unchanged because the increase in government transfer injections is exactly offset by the tax withdrawal.
Aggregate demand will decrease because transfer payments are not included in the calculation of Gross Domestic Product (GDP).
245 exam-style questions on AQA A Level Economics 2.5 Fiscal policy and supply-side policies, covering 2.5.1 Fiscal policy and 2.5.2 Supply-side policies. Each one has a worked solution and a mark scheme showing where the marks go.