The magnitude of the tax multiplier is smaller than the magnitude of the government expenditure multiplier because
A)a change in taxes does not change expenditures.
B)an increase in taxes decreases expenditures.
C)a decrease in government expenditure decreases tax revenue.
D)a change in taxes does not change expenditures by as much as the same size change in government expenditure.
E)a change in taxes creates additional induced taxes.

Question

Quizplus · Accepted Answer

A change in taxes has a smaller impact on aggregate demand than a change in government expenditure of the same magnitude because some of the tax change will be saved instead of spent, reducing the size of the induced spending multiplier. Additionally, changes in taxes may also affect individuals' incentives to work and invest, further reducing the overall impact on aggregate demand. On the other hand, a change in government expenditure directly increases aggregate demand and does not have these disincentive effects.

The Magnitude of the Tax Multiplier Is Smaller Than the Magnitude