The tax multiplier is smaller in absolute value than the government purchases multiplier because some portion of the
A)decrease in taxes will be saved by households and not spent,and some portion will be spent on imported goods.
B)decrease in taxes will be saved by households and not spent,and some portion will be spent on consumer durable goods.
C)increase in government purchases will be saved by households and not spent,and some portion will be spent on imported goods.
D)increase in government purchases will be saved by households and not spent,and some portion will be spent on consumer durable goods.

Question

Quizplus · Accepted Answer

When taxes are decreased, households may not spend all of the additional money they have. Some of it may be saved or used to purchase imported goods, which reduces the impact of the tax cut on the economy. In contrast, an increase in government purchases directly injects more money into the economy and has a greater impact on economic activity. Therefore, the tax multiplier is smaller in absolute value compared to the government purchases multiplier.

The Tax Multiplier Is Smaller in Absolute Value Than the Government