Suppose that a $4 billion increase in government spending increases Real GDP by $60 billion,and that a $3 billion tax reduction increases Real GDP by $39 million. In this situation,the tax multiplier is _______________ the government spending multiplier.

Question

Quizplus · Accepted Answer

The tax multiplier can be calculated as the change in Real GDP divided by the change in taxes. In this case, the tax multiplier is ($39 million/$3 billion) = 0.013.

The government spending multiplier can be calculated as the change in Real GDP divided by the change in government spending. In this case, the government spending multiplier is ($60 billion/$4 billion) = 15.

Since the tax multiplier is smaller than the government spending multiplier, we can say that the tax multiplier is less than the government spending multiplier.

Suppose That a $4 Billion Increase in Government Spending Increases