The multiplier is reduced by an income tax because an income tax reduces the fraction of each dollar of GDP that consumers actually receive and spend.

Question

Quizplus · Accepted Answer

An income tax reduces the disposable income of consumers, which means they have less money to spend on consumption. This reduces the fraction of each dollar of GDP that is spent on consumption, thus decreasing the multiplier effect.

The Multiplier Is Reduced by an Income Tax Because an Income