The multiplier that should be applied to a change in taxes is:
A) -(1/(1 - MPC) - 1).
B) 1/(1 - MPC).
C) -1/MPC.
D) -1(MPC - 1).

Question

Quizplus · Accepted Answer

The correct multiplier for a change in taxes is given by the formula -(1/(1 - MPC) - 1). This is because a change in taxes indirectly affects consumption by changing disposable income, and the marginal propensity to consume (MPC) determines how much of an additional dollar of disposable income will be spent. The formula accounts for the indirect effect of taxes on spending through the MPC.

The Multiplier That Should Be Applied to a Change in Taxes