Question

The multiplier effect occurs when an initial increase (or decrease) in autonomous expenditure produces a greater increase (or decrease) in real GDP than the initial change. In which type of discretionary fiscal policy does the multiplier play a role

Answer 1

Answer: b. both government spending changes and tax changes

Explanation:

The Multiplier effect as described in the question applies when the Government uses either taxes of Government Spending to influence the economy. When Taxes are imposed or relaxed however, it has been shown that they provide a less multiplier effect than when the Government uses Spending as an influence.

This is because when the Government spends it leads to a ripple effect that creates more income but when taxes are cut and people have more disposable income, it is up to them how much of that to save and how much to spend and they usually do not spend all of it.