One of the reasons the tax cut does not have the same effect as the government spending multiplier is the marginal propensity to consume/save. This means that when people receive a tax cut they have extra money in their hands but may not spend it all because it depends on their MPC. If it is 0.8, it means that they will spend $80 out of every $100, saving the other $20 which could have gone into spending to stimulate the economy. On the other hand, with government spending, 100% of the money is spent and goes directly into GDP expenditures to be expanded by the multiplier effect. More spending creates demand and revenue for firms that lead to more investment and jobs.

Now, assume the government wants to increase the long-term growth rate of the economy and considers the policy options listed below. In your opinion, which of these policies will be successful in stimulating long-term growth and why?

(a) expansionary monetary policy

(b) an increase in government spending

(c) tax credits to stimulate new research and development

(d) policies to improve education

(e) policies to control population growth