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 $68 billion.In this situation,the tax multiplier is _______________ the government spending multiplier.

Question

Quizplus · Accepted Answer

The spending multiplier measures the change in real GDP resulting from a change in government spending, while the tax multiplier measures the change in real GDP resulting from a change in taxes. We know that a $4 billion increase in government spending leads to a $60 billion increase in real GDP, so the spending multiplier is 15 ($60 billion / $4 billion). We also know that a $3 billion tax reduction leads to a $68 billion increase in real GDP, so the tax multiplier is 22.67 ($68 billion / $3 billion). Since the tax multiplier is higher than the spending multiplier, we can conclude that the tax multiplier is greater than the government spending multiplier.

Suppose That a $4 Billion Increase in Government Spending Increases