10. Agreements and disagreements among economists regarding fiscalpolicy Consider a hypothetical economy in which households spend $0.50 of each additional dollar of their after-tax income. The expenditure multiplier for this economy is . Suppose that this economy is experiencing a recession. The government would like to stimulate aggregate demand and is deciding whether it should increase its spending by $1 billion or reduce income tax by $1 billion. Assume other things remain constant, and the marginal propensity to consume remains at 0.5. Before any multiplier effect takes place, a $1 billion increase in government spending will increase the aggregate demand by $ billion, while a $1 billion reduction in income tax will increase the aggregate demand by billion. Now consider the effect of each fiscal policy after the multiplier effect is complete. A $1 billion increase in government spending will result in a total increase of aggregate demand by $ billion, whereas a $1 billion reduction in income tax will result in a total increase of aggregate demand by $ billion. Keynesians believe that the multiplier effect of an increase in government spending will be that of a tax cut of the same amount. True or False: A government spending increase can generally begin to impact the economy more rapidly than a tax cut. True False