(Scenario: Fiscal Policy)Refer to 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) 0,because changes in taxes have no effect on aggregate demand.
D) impossible to determine.

Question

Quizplus · Accepted Answer

The tax multiplier is less than the government spending multiplier. This means that a $1 increase in taxes will lead to a smaller decrease in aggregate demand compared to a $1 increase in government spending. The exact value of the tax multiplier depends on various factors such as the marginal propensity to consume and the marginal tax rate, but in general, it is smaller than the government spending multiplier.