If taxes were a lump-sum amount, then the magnitude of the government spending multiplier ________ it would be if taxes depend on income.

Question

Quizplus · Accepted Answer

When taxes are a lump-sum amount, the government spending multiplier is larger because lump-sum taxes do not change with income, meaning that an increase in government spending does not lead to an increase in taxes that could offset the multiplier effect. In contrast, if taxes depend on income, an increase in income due to government spending would lead to higher taxes, which could dampen the multiplier effect.

If Taxes Were a Lump-Sum Amount, Then the Magnitude of the Government