Question

If a tax cut of $12 billion causes real GDP to increase by $36 billion, then the tax multiplier is:________.

Answer 1

Answer:

If a tax cut of $12 billion causes real GDP to increase by $36 billion, then the tax multiplier is:________.

b) 3.

Explanation:

The tax multiplier is the effect of tax on aggregate demand, government spending, and industrial investment (GDP).  A tax cut increases the marginal propensity to consume and to save, which in their turns increase the aggregate demand and investments, which are important ingredients in the calculation of a country's Gross Domestic Product (GDP).  A tax cut also decreases government's ability to spend, which also affects the GDP negatively.  It has been established that to stimulate GDP growth, economies have relied on cutting taxes at some times.

The proportion of the tax cut to the GDP is 12: 36 in this case equals 1 : 3, therefore, the tax multiplier is 3.