Suppose output is demand determined.An increase in the net tax rate ________ the marginal propensity to spend and thus ________ the simple multiplier.
A)raises; raises
B)raises; lowers
C)causes no change in; raises
D)lowers; lowers
E)lowers; raises

Question

Quizplus · Accepted Answer

An increase in the net tax rate lowers the disposable income of households, resulting in a decrease in consumption spending. Lower consumption spending implies a lower marginal propensity to spend, which, in turn, lowers the simple multiplier. Therefore, a higher net tax rate leads to a lower multiplier effect on output.

Suppose Output Is Demand Determined