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    Aggregate demand and transfer payments

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    What happens to aggregate demand when transfer payments and the taxes to pay them both rise by the same amount?

    Will consumers always spend the same percentage of any tax cut? Why might they spend more or less the usual?

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    When transfer payments and taxes go up, aggregate demand is likely to reduce. Every time individuals have to pay more for anything, spending propensity of the population reduces which in turn reduces the aggregate demand. Transfer payments involve transferring money from the less needy to the more needy. Therefore, ...

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    This solution helps with a problem regarding aggregate demand and transfer payments.