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Scenario: Fiscal Policy
Consider the economy of Arcadia. Its households spend 75% of increases in their income. There are no taxes and no foreign trade. Its currency is the arc. Potential output is 600 billion arcs.
-(Scenario: Fiscal Policy) Look at the scenario Fiscal Policy. Suppose the government decides to tax its citizens. The tax multiplier is:
A)greater than the government spending multiplier.
B)less than the government spending multiplier.
C)zero, because changes in taxes have no effect on aggregate demand.
D)impossible to determine.

Question

Quizplus · Accepted Answer

The tax multiplier is always less than the government spending multiplier because the fraction of income saved is positive and less than one, while the fraction of income spent is positive and less than one. Therefore, the value of the tax multiplier is always negative while the government spending multiplier is always positive.

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