The inclusion of a tax rate in the model results in a new multiplier that is:
A)larger than the original multiplier.
B)the same as the original multiplier if the economy is in a recession.
C)smaller than the original multiplier.
D)not affected by automatic stabilizers.

Question

Quizplus · Accepted Answer

The inclusion of a tax rate in the model results in a smaller multiplier because the taxes reduce the disposable income of individuals, decreasing their consumption and overall spending, and thus reducing the impact of an initial increase in government spending. The size of the multiplier depends on the marginal propensity to consume and the marginal tax rate. Choices A, B, and D are incorrect because they do not reflect the impact of taxes on the multiplier.

The Inclusion of a Tax Rate in the Model Results