Final answer:
The impact of tax cuts on equilibrium GDP depends on the marginal propensities to consume and save.
Explanation:
The larger the marginal propensity to consume, the more significantly a reduction in taxes will impact the equilibrium GDP. This is because a higher marginal propensity to consume leads to a greater increase in consumption when taxes are cut, boosting overall economic activity.
Conversely, a larger marginal propensity to save may result in a smaller impact on GDP, as more income is saved rather than spent, potentially dampening the overall economic stimulus.
Understanding these propensities is crucial in predicting how changes in tax policies affect consumer behavior and, consequently, the economy's equilibrium GDP.
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