Exhibit 11-2

-Refer to the graph in the exhibit.Consider an economy characterized by the aggregate expenditure line.Suppose net taxes are independent of the level of real GDP.What is the tax multiplier?
A) 0
B) 1
C) 2
D) 3

Question

Exhibit 11-2
 
-Refer to the graph in the exhibit.Consider an economy characterized by the aggregate expenditure line.Suppose net taxes are independent of the level of real GDP.What is the tax multiplier?  
A) 0 
B) 1 
C) 2 
D) 3

Quizplus · Accepted Answer

If net taxes are independent of the level of real GDP, then the tax multiplier is equal to 1. This is because any change in autonomous spending (such as investment or consumption) will lead to a change in aggregate demand and, in turn, a change in real GDP. However, because net taxes do not change, there is no corresponding change in disposable income that would lead to a further change in aggregate demand. Therefore, the tax multiplier is 1, meaning that a $1 change in autonomous spending leads to a $1 change in real GDP.

Exhibit 11-2 -Refer to the Graph in the Exhibit.Consider an Economy Characterized