If the government levies a lump-sum tax T_o rather than an income tax, the spending multiplier would be equal to A) 1 / (C_y - IM_y). B) 1 / (1-(C_y(1-T_o) - IM_y)). C) 1 / (1-(C_y - IM_y)). D) 1-C_y - IM_y.

Question

Quizplus · Accepted Answer

The spending multiplier for a lump-sum tax is given by 1 / (1 - (C1 - IM1)), where C1 is the marginal propensity to consume and IM1 is the marginal propensity to import. This formula does not adjust consumption for taxes since a lump-sum tax does not directly affect the marginal propensity to consume.

If the Government Levies a Lump-Sum Tax To Rather Than

If the Government Levies a Lump-Sum Tax T_o Rather Than