Question

The effects on aggregate demand of an open market purchase and a tax cut are similar.

True or False

Answer 1

True

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Open market purchase:

It means the central bank of country purchases bonds in the open market. The bonds go to the Fed and money into the public. It increases the money supply and decreases interest rate which increases consumption and investment spending in the economy which increases aggregate demand.

Tax cut:

A tax cut increases disposable income, and it increases consumption and investment spending which increases aggregate demand.