Question

How does the spending multiplier compare between a $1,000 increase in government spending and a $1,000 decrease in taxes collected? Question 8 options: a) Neither an increase in government spending nor a decrease in taxes generates any multiplier at all. b) An increase in government spending has the same spending multiplier as an equivalent tax decrease. c) An increase in government spending has a greater spending multiplier than an equivalent tax decrease. d) An increase in government spending has a smaller spending multiplier than an equivalent tax decrease.

Answer 1

Answer: Option B

Explanation: In simple words, spending multiplier refers to the effect that the spending from the govt have on an economy. As per this effect, if the govt. spends a little on the economy the multiplier effect will come into force and make a major impact on the organisation.

Government spending refers to the total outflow of resources made by the govt. for the betterment of economy. However the decrease in tax will not directly be considered an outflow but it surely does increase their revenue leading to more demand in the economy.

Hence from the above we can conclude that the correct option is B .