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    How consumer demand responds to tax cuts

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    Suppose you notice that a $7 billion tax-cut was accompanied by a $9 billion increase in consumer spending in the same year. How would you explain why consumer spending increased by more than the tax-cut?

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    Solution Preview

    There are several things that could cause them, and likely all of them contributed to the net result. Firstly, consumers may not be entirely rational about their refunds. Once they start spending, they may spend more than they actually intended, or think that the refund is making them ...

    Solution Summary

    Why consumer demand can increase by more than the amount of a tax cut is determined.