Question

. Explain why the tax multiplier is different from the government purchases multiplier, in both sign and relative magnitude.

Answer 1

Explanation:

This is the case because the tax multiplier has a negative sign due to the negative magnitude or lesser impact it has on the economy.

For example, when government cut taxes income may increase, however not everyone of those income will be spent in the economy because some of it may be saved.

However, a change in government purchases will have a positive impact as well as larger effect on the economy than a mere change in the tax multiplier.

In summary, the tax multiplier is different from the government purchases multiplier, in both sign and relative magnitude because of the varying degrees of their usage.