In the Keynesian-cross analysis, assume that the analysis of taxes is changed so that taxes, T, are made a function of income, as in T = T + tY, where T and t are parameters of the tax
Code and t is positive but less than 1. As compared to a case where t is zero, the multiplier for government purchases in this case will:
A)not change.
B)be smaller.
C)be bigger.
D)be equal to 1.

Question

Quizplus · Accepted Answer

When taxes are a function of income, the marginal propensity to consume out of disposable income decreases, leading to a smaller multiplier effect for government purchases.

In the Keynesian-Cross Analysis, Assume That the Analysis of Taxes