The formula for calculating the tax multiplier is
A) MPC/(1 - MPC)
B) MPC/(1 + MPC)
C) -MPC/(MPC - 1)
D) -MPC/(1 - MPC)
E) MPC + (1 - MPC)

Question

Quizplus · Accepted Answer

The tax multiplier (TM) measures the effect of a change in taxes on aggregate demand. The formula for TM is TM = -MPC/(1 - MPC), where MPC is the marginal propensity to consume. The correct formula for TM should have a negative sign in the numerator since taxes have an inverse relationship with consumption. Choice A, B, and E are incorrect because they either have an incorrect sign or an incorrect denominator. Choice C also has an incorrect sign and an incorrect denominator.

The Formula for Calculating the Tax Multiplier Is