Which of the following is true regarding induced taxes?
I. Induced taxes vary with disposable income.
II. Induced taxes cause the multiplier effect to be greater than it would be otherwise.
III. Induced taxes weaken the link between real GDP and disposable income.

Question

Quizplus · Accepted Answer

Induced taxes vary with disposable income, as individuals' tax liability increases with their income. They weaken the link between real GDP and disposable income, as an increase in GDP leads to an increase in taxes, which decreases disposable income and therefore decreases consumption. However, induced taxes do not necessarily cause the multiplier effect to be greater than it would be otherwise, as the size of the multiplier effect depends on the Marginal Propensity to Consume (MPC), which may not necessarily be affected by induced taxes.

Which of the Following Is True Regarding Induced Taxes