Jake lives in the fictional country of Lindelof, which raises government revenue by taxing everyone the same amount. The government of Lindelof has just implemented a tax cut that reduces annual taxes by $3,500 per person. However, government spending has not changed, nor is it likely change in the future. The tax cut has raised Jake's income by $3,500. If Jake acts according to the prediction of new classical economics (and doesn't plan to leave Lindelof), his consumption is likely to increase by .
a. $3,150
b. $0
c. $3,500
Suppose that instead of cutting taxes while keeping its spending the same, the government did the opposite: it increased its spending by $3,500 per person while keeping taxes the same. If everyone in Lindelof acted like Jake, the likely increase in aggregate demand would be per person.
a. $3,150
b. $0
c. $3,500