The multiplier for changes in taxes is smaller than the multiplier for changes in government purchases because not every dollar of tax cut is spent.

Question

Quizplus · Accepted Answer

This statement is true. The multiplier for changes in government purchases assumes that every dollar of government spending will be spent, which increases overall demand and leads to a larger multiplier effect. However, the multiplier for changes in taxes is smaller because not every dollar of a tax cut is spent. Some of the tax cut may be saved or used to pay off debt instead of being spent, which reduces the overall impact on demand and the size of the multiplier effect.

The Multiplier for Changes in Taxes Is Smaller Than the Multiplier